My Stocks and Shares ISA is an investing tool I can use to help me be more tax efficient in my investments. When I hold a stock within my ISA and sell it for a profit, I don’t have to pay any capital gains tax on the proceeds. The ISA deadline is at the start of April each year. This means that we’re just over halfway through the current ISA year. Given all that has happened in the past six months, here are the lessons that I’ve learnt.
Covid-19 is the key driver
We entered the current ISA year having endured a winter lockdown. Restrictions were slowly eased in the late spring, something that enabled a lot of FTSE-listed companies to operate with less hindrance. The correlation between specific stocks and Covid-19 has continued to be strong during this period.
The key lesson I’ve taken from this is that the market continues to be sensitive to developments around the pandemic. In fact, I think this will continue to be the case for the remainder of the ISA year and beyond. I’ve tried to position my overall portfolio to be more defensive during this period, to reduce the risk if we see another market crash.
Holding dividend stocks in the ISA
A second lesson from the past six months has been the benefit of holding dividend stocks. Dividend yields have risen within the FTSE 100. In fact, the average FTSE 100 dividend yield now sits at a generous 3.5%. In recent months when the FTSE 100 has remained range bound, dividend payments have been a great source of income.
It makes me feel like my money is working hard for me within the ISA. I think this is going to be equally important going forward. Rising yields are a good thing for those looking for passive income. There are even FTSE 100 stocks offering a yield above 10%! However, before snapping these up, I need to be aware of the risks for some ultra-high-yield stocks. I also need to be aware that some dividends were cancelled during the pandemic period.
Inflation is back in focus
Back in April, UK inflation was at 1.5%. This was below the target rate from the Bank of England of 2%. If we fast forward to the present day, inflation is at 3.2%. It has risen significantly over the past six months to become a real issue.
Inflation worries have been one large factor (after Covid-19) for wobbles in the FTSE 100. The concern is that higher inflation will force the Bank of England to raise interest rates faster to stem demand. Higher rates make it more expensive for companies to issue and refinance debt.
The lesson I’ve taken from this is that I’m avoiding new ISA investments in debt-laden companies. I also look more favorably on firms that could benefit from higher interest rates (such as banks).
Overall, the past six months have taught me several key lessons that I’ll carry forward when looking to make new investments into my ISA.
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jonathansmith1 and The Motley Fool UK have no position in any share mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.