Like many other people, I invest money through a Stocks and Shares ISA. Right now, if I had a spare £1,500 I wanted to use buying shares in the ISA, here is how I would go about it.
Focus on my objectives
First I would decide what I wanted to try and achieve with the money. Should I target growth, income or a combination of the two?
I have been buying income shares lately and continue to see some attractive dividend yields available to me from companies I like. For example, M&G is yielding 8.4% while British American Tobacco offers 6.7%. I own both shares but would consider buying more. One risk is always whether a company’s profits can support a dividend in future, so I will be paying attention to M&G’s interim results in the coming days to see whether it is struggling to keep customers like some rivals.
There are also some companies I do not own but am tempted to invest in at the moment. For example, housebuilder Persimmon and its 12.5% yield keep catching my eye. There is obviously a risk that housing sales could fall – and there was already some evidence of this in the builder’s most recent results. However, I think that risk is priced in to the shares at their current level.
Although I would be tempted to try and lock some of these dividend yields into my Stocks and Shares ISA, I also think there are some strong growth stories ‘on sale’ right now. ITV has seen revenues in its production business grow strongly, but its shares are still 37% lower than a year ago.
Software company Kainos is down 17% in a year. But does its growth profile justify a price-to-earnings ratio of 50? That is more than I would be willing to pay. Even for companies I think have strong growth prospects, I think it is important to pay attention to valuation. A good company bought at too high a price can make a bad investment.
Diversifying my Stocks and Shares ISA
Having decided my investment objectives and shortlisted what I felt were great businesses selling at attractive share prices, I would then make my shopping list.
To reduce my risk, I would diversify my purchases. With £1,500 I could invest £500 in each of three businesses. That would give me some diversification.
Looking at my own recent purchases, I have been more focused on income than growth. Given some of the dividend opportunities available, I would probably split the £1,500 today by buying £1,000 of income shares and £500 of growth shares for my portfolio.
Of course the split is not always precise. I see ITV as growth share, for example, but with its current dividend yield of 7%, I could equally well think of it as an income share. Hopefully, with the right choices, I could see long-term growth in the worth of my Stocks and Shares ISA — while also receiving income in the form of dividends.