If I had a lump sum of £1,000 to invest today, the first thing I would do is open a Stocks and Shares ISA. Now the dividend tax allowance has dropped to just £2,000 a year, these tax-efficient products are more attractive than ever before.
Stage one
You can contribute a maximum of £20,000 a year to a Stocks and Shares ISA. Any income or capital gains earned on investments held inside one of these wrappers doesn’t attract tax. In fact, you don’t even need to declare the income or capital gains on your tax return.
Opening a Stocks and Shares ISA with a lump sum of £1,000, will not only protect this money from the taxman, but it will also help you prepare for the future. As you cannot roll-over any unused ISA allowance to a new tax year, it’s best to make the most of it whenever you can.
Stage two
After opening a Stocks and Shares ISA, it’s time to pick some investments. For investors looking for exposure to income and capital growth, I think one of the best investments on the market right now is Vanguard’s UK Equity Income fund.
This fund is a passive tracker fund. Its goal is to replicate the performance of the UK equity income index. To do this, it charges an annual management fee of 0.14% per annum. Since its inception, the fund has yielded a total return for investors of around 10% per annum. And, at the time of writing, it supports a dividend yield of approximately 5.5%.
If you’re looking for a portfolio that has a bit more of a kick, an FTSE 250 tracker fund might be more suitable. Indeed, since inception, the FTSE 250 has produced an average annual return of around 12%, although the index doesn’t offer much in the way of income.
Another option is the Vanguard FTSE All-World UCITS ETF. This ETF tracks the performance of the FTSE All-World index, which is essentially a world stock index. It’s the closest thing we have to global stock benchmark. Because the index is a market capitalisation weighted, it tends to have a higher exposure to developed market stocks.
Building the portfolio
So if you’re looking to invest £1,000 today, these three funds all offer an attractive proposition. You could pick just one or all three, depending on what you want to achieve and your investment horizon.
Personally, I have a substantial investment in Vanguard’s UK Equity Income offering. I believe this fund offers investors the perfect combination of income and capital growth.
What’s more, multiple studies have shown that over the long term, dividends make up more than half of market returns. I reckon a low-cost dividend tracker fund is a great way to take advantage of this market anomaly.