With all the recent talk about the Cash ISA limit being cut to £12,000, I wondered what I should do to protect my tax-free benefits.
So, I asked ChatGPT for advice. Its first suggestion? Keep a Cash ISA just for easy-access money, since passive income from it is minimal – and instead focus on building a Stocks and Shares ISA.
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Blended portfolio
ChatGPT suggested putting 50% of my ISA into UK dividend ETFs, which currently yield around 4%. Its preferred options were the iShares UK Dividend UCITS ETF and the Vanguard FTSE UK Equity Income ETF.
On the individual stock side, its top dividend picks were Diageo (4%), BP (5.2%), HSBC (4.5%), Shell (3.8%) and National Grid (5%) – all large, mature businesses with long dividend histories.
It also advised allocating 15% of the portfolio to bonds and REITs for stability and diversification. Here, it highlighted the iShares UK Gilts ETF and the iShares UK Property UCITS ETF.
Diversification
The AI bot might label this a highly “diversified” portfolio – but I wouldn’t.
For a start, many of its individual stock picks are already core constituents of the ETFs, and most sit within their top 10 holdings. That means far less diversification than it appears on the surface.
Secondly, I’m not convinced that UK gilts provide the diversification they once did. With debt-to-GDP around 100%, I’d much rather hold assets that tend to retain value, such as gold and silver mining stocks.
Thirdly, none of the suggestions leaned into high-income stocks. If a Cash ISA yields 4%, why would I take equity risk for little or no additional reward?
High yielders
Personally, I generally prefer dividend stocks over pure growth plays. They fit my risk tolerance far better, and I get the added bonus of twice-yearly payouts that I reinvest each year – a simple habit that steadily builds compound wealth over time.
Most investors underestimate compounding, yet it’s the same principle Warren Buffett has used for more than half a century.
One stock I continue to hold in my ISA is Legal & General (LSE: LGEN). Unlike its peer Aviva, the share price has largely stagnated, keeping the dividend yield elevated at around 8.7%.
The shares have struggled because the company hasn’t generated positive free cash flow for the last two years. Last year alone saw cash outflows of more than £4bn. At the same time, its biggest profit driver, pension risk transfer, has faced rising competition, pressuring margins.
Long-term play
Despite recent challenges, I still have confidence in the stock for one key reason. The dividend is supported by core operating earnings, even if the headline figures look messy.
Put simply, the cash-generating parts of the business continue to fund the payout. In 2024, the dividend was covered 1.42 times, comfortably clear of what I’d consider a danger zone.
Legal & General also remains one of the best-known names in UK financial services, with long experience in asset management, workplace pensions and retirement planning. Its scale lets it secure big pension and investment mandates that smaller firms simply can’t compete for, giving it a steady stream of business.
For anyone tracking long-term income trends, the company’s ability to keep generating cash is a theme worth watching.
