£3,000 in savings? I’d start investing with a Stocks and Shares ISA

For investors with cash stashed away, this Fool thinks using a Stocks and Shares ISA is the best way to kickstart an investment journey.

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For investors sitting on a pile of cash savings, I think investing through a Stocks and Shares ISA is one of the best ways to start making their money work for them.

With £3,000 in savings, here’s how I’d begin investing today.

Enhancing profits

With a lump sum of savings, I’d want to ensure that I was putting it to the best use possible and ensuring that I could maximise my profits. That’s why I believe an ISA is the best option.

Every year, each UK investor is given a £20,000 limit to invest, within which the profits made incur not a penny in tax. While in the short term that may seem insignificant, over years and decades that makes a massive difference.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Spreading the risk

If I had thousands to invest, I wouldn’t want to pile it all into one stock. Instead, I’d diversify across five to 10 businesses.

Diversification is key to any successful portfolio. Doing so offsets risks, meaning I’m not liable to one company or industry.

If that company or industry experienced large bouts of volatility, I wouldn’t be at risk of seeing all my investment pot dwindling.

Making more money

An extra way I’d try to snowball my gains is to target companies that pay a high dividend yield. This means I can start making passive income.

With the dividend payments I receive, I’d reinvest it back into buying more shares of the companies I own. By doing that, I’d benefit from compounding. That means I’d essentially be earning interest on my interest.

A stock to consider

With the above in mind, it’s stocks such as Aviva (LSE: AV) I’d target. In the last five years, its share price has risen 22.1%, outperforming the FTSE 100, which is up 16.1%.

Its share price has also been gaining momentum this year, rising 12.5%. But even with these gains, I think the stock still looks like good value for money trading on 12.9 times earnings. That’s cheaper than its industry peers Prudential (15.7) and Admiral Group (24.6).

Along with that, the stock boasts a 6.9% dividend yield, comfortably above the Footsie average. Last year, its dividend payout increased by 8% while it also announced a £300m share buyback scheme. Looking ahead, the business recently upgraded its dividend guidance and now expects to grow its cash payout by mid-single-digits.

I’m also bullish on Aviva due to the moves it’s making to streamline its operations. In recent years, it has got rid of a number of its underperforming businesses. Alongside that, it has also made multiple acquisitions to bolster shareholder returns.

For example, in its latest Q1 results, it announced that in March it exited its Singapore joint venture, “further simplifying the group’s geographic footprint”. It also announced that in April it completed the acquisition of AIG’s UK protection business for just over £450m.

The risks I see with Aviva is that these streamlining actions leave it reliant on just a couple of markets. There’s also the threat of competition, which is rising in the insurance industry.

But I’d still buy some shares today if I had the cash. And while I’d diversify my portfolio, it’s companies like Aviva that I’d look to purchase.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group Plc and Prudential Plc. 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.

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