I think using a Stocks and Shares ISA is one of the best ways to invest in the market. Any income or capital gains earned on assets held within one of these wrappers doesn’t attract any further tax. In fact, investors don’t even need to declare the income on their tax returns.
The annual ISA allowance is £20,000 but, understandably, not everyone has £20k lying around to invest each year. But investors don’t have to use the whole allowance. Even a relatively small sum, such as £3,000, can provide the same tax benefits.
With that in mind, here’s how I’d invest £3k in a Stocks and Shares ISA today.
As I explained, ISA investments don’t attract tax. I think that makes them the perfect accounts to hold income investments. My favourite income investments are National Grid and Severn Trent.
These two utility companies provide an essential service for customers. National Grid operates the electricity network in England, and Severn Trent delivers water and wastewater services.
These businesses aren’t growth companies. As such, I think it’s unlikely investors will see significant capital returns from these enterprises. However, their operations’ slow and steady nature means they generate steady, predictable income streams, which underpin their dividends.
At the time of writing, National Grid supports a dividend yield of 5.7%. Severn offers 4.4%. However, these are just projections at this stage, and there’s no guarantee either company will hit their targets.
The biggest challenge both companies face is regulatory headwinds. Regulators determine how much money these firms are allowed to earn on their assets. That essentially means profitability can be capped. A new strict regulatory regime could limit profitability, which may force dividend cuts.
Still, I’d buy National Grid and Severn Trent for my Stocks and Shares ISA today as income investments despite these risks.
Stocks and Shares ISA growth plays
After investing a portion of my £3,000 in income investments, I’d deploy the rest in a growth investment.
There are many options to choose from, but I’d buy Scottish Mortgage Investment Trust to get the most bang for my buck.
This investment firm owns a basket of international growth companies, which would be difficult for me to replicate individually with such a small investment.
For example, the largest holding in the portfolio is the Chinese tech group Tencent Holdings. The investment company also owns stakes in private businesses, which would be almost impossible for individual investors to acquire.
The most considerable risk of investing in this trust is the fact that tech stocks dominate the portfolio. This means it can be volatile. Earlier in the year, when the tech sector sold off, shares in Scottish Mortgage plunged by nearly 30% in a few days. Some investors might not be comfortable with this level of concentration.
However, as a way to invest in a diversified basket of international growth stocks, I’d buy Scottish Mortgage for my Stocks and Shares ISA.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares 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.