Volatility continues in broader financial markets. On Wednesday, as banks announced they’d be axing their dividends, their shares plummeted, taking down many other stocks with them.
Today I’d like to remind our readers that the ISA deadline is here and discuss why I’d consider defensive shares for my portfolio now.
ISA deadline is this weekend
Britons know that we’ve an important date coming up this weekend. As our tax year runs from 6 April to 5 April, and the deadline for individuals to contribute to the previous year’s ISA is midnight 5 April.
In other words, it’s time to use your £20,000 ISA allowance for this tax year. And it’s a ‘use it or lose it’ entitlement. You can’t carry it forward if you don’t use it within a tax year.
The rapid decline in stock markets is unnerving for many investors. Yet it’s hard to deny that it has created buying opportunities for including in a Stocks and Shares ISA.
After all, if you liked a company for robust fundamental reasons earlier in the year, you should really like it even more when its share price is on sale, especially if you buy it via an ISA that has tax advantages.
Each individual’s tax situation may be different, but as a general rule of thumb, the more individuals are able to minimise taxation of their income and gains, the more returns they retain and the more their savings grow over time.
Why I’d buy defensive shares
Markets are still reacting negatively to the global pandemic news. Many countries are living under some form of lockdown. And we may be headed for an economic downturn not just in the UK, but in many other countries, too.
Although several industries are clearly having a difficult time, some other defensive ones are likely to hold up better.
Defensive shares may help investors better protect their capital and still get acceptable returns, especially in times of economic uncertainty. If they also provide robust dividends, it’s the icing on the cake.
Identifying these potentially less volatile industries to add to a Stocks and Shares ISA now will pay off in the long term. For starters, supermarkets, which are consumer staples, are generally resilient. At this point our shopping is pretty much limited to a visit to our local food retailer or to an online store.
Not surprisingly, despite the sell-off in broader markets, shares of supermarkets and grocery stores have been holding up rather well. They include Morrisons, Ocado, Sainsbury, and Tesco. Other than Ocado, they all pay dividends.
There are other defensive shares that may also be appropriate for the current ‘stay-at-home economy’. For example, utilities and telecoms don’t require people to leave their homes to make money.
Their dividend yields also tend to be juicier that those offered by food stocks. Several names you may want to analyse are BT Group, Centrica, ContourGlobal, Drax, National Grid, Pennon Group, Severn Trent, SSE, Talktalk, Telecom Plus, United Utilities, and Vodafone.
The Foolish takeaway
Each investor has a different risk tolerance. In volatile times such as this, I believe it may be prudent for investors to buy into shares of businesses they’re comfortable holding in their ISAs. Such defensive stocks should allow them to sleep well at night while getting decent long-term returns in a tax-efficient manner.
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tezcang owns shares of Morrisons. The Motley Fool UK has recommended Pennon Group and Tesco. 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.