A Stocks and Shares ISA is a great way for me to invest in a tax efficient manner. Every year, I’m able to invest £20,000. For me, allocating this amount of money requires serious thought. I prefer to split the £20,000 four ways to achieve a diversified portfolio. How do I go about doing this and which companies do I plan to buy? Let’s take a closer look.
Dividends
The first strategy I’ll use is to buy well-established, FTSE 100 stocks for the purpose of gaining passive income.
Passive income may be derived from dividends and, occasionally, share buyback schemes.
It’s worth noting, however, that dividend policies may be subject to change or disappear entirely, depending on company performance.
While the FTSE 100 has a lot of high-yielding dividend firms, I’m choosing Barclays and Legal & General. These have yields of 3.3% and 6.2%, respectively.
I’ll take 30% of my £20,000 — about £6,660 — to buy shares in these companies. Together, the dividends could generate around £350 per year, simply from holding the stocks.
It should be noted, however, that both of these companies may see cost inflation eating into future balance sheets.
Growth
Next, I’ll look for high-quality growth stocks. While these investments may be riskier, they could add significant value to a Stocks and Share ISA over the long term.
For this type of investment, I’ll look to less developed companies in the AIM 100 index. I want to see how much these businesses are growing. I’d use another 30% of my £20,000 for these growth stocks.
dotDigital, the marketing software company, has a compound annual earnings-per-share (EPS) growth rate of 10.8%. This shows that the firm has been increasingly profitable over the past five years.
It recently signed a two-year deal with Adobe, which could generate even more organic growth in the future.
Games Workshop, a business selling fantasy miniatures, also has an impressive compound annual EPS growth rate of 31.4%.
While sales improved for the six months to 28 November, pre-tax profits fell from £91.6m to £86m.
In addition, it should be noted that past performance isn’t necessarily indicative of future performance.
Commodities and cash
I’ll also buy some commodity-tracking stocks as a potential hedge against inflation with 20% of my £20,000, which is £4,000. These might include the Mexican silver mining firm Fresnillo.
Although this company has seen a production decline from pandemic worker absences, it’s currently benefiting from historically high metals prices.
Gold business Centamin may also be a good addition as the gold price is at $1,858 per ounce, up from $1,200 in August 2018.
Although its profits halved last year, the firm held its production guidance for 2022.
Finally, I’ll keep the final £4,000 in cash. While this poses inflation risk, it will allow me to buy more stocks during any market dips.
Corrections have occurred with relative frequency recently and buying during these times will enable me to lower my average weighted prices.
Overall, this way of investing £20,000 in my Stocks and Share ISA will hopefully strike a balance between security and higher risk growth. I’ll be buying these shares soon and waiting to buy during dips with my available cash.
The post How I’ll invest a £20,000 Stocks and Shares ISA for diversification appeared first on The Motley Fool UK.
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Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, Fresnillo, Games Workshop, and dotDigital Group. 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.