If I had a spare £500 that I wanted to invest in UK stocks right now. Here’s what I would do.
Investment objectives
My first move would be to be really clear on what I wanted to do with the money.
For example, I might hope to generate passive income from the investment. Alternatively, I might be seeking capital growth via a company I expect to race ahead in years to come.
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Alternatively, I might simply want to tuck the money away in some well-known UK stocks and not think about it until I retire.
Risk management
£500 is not a large amount of money when it comes to investment. Dealing charges and commissions can eat up a proportionately larger amount when investing that sort of money compared to, say, £20,000.
However, I would still want to manage my risk by diversifying. With £500 I could buy at least two different shares. That’s less diversification than I would like for my whole portfolio. But I regard it as better risk management than putting the whole £500 into one name.
Passive income picks in UK stocks
If my objective was passive income, I would look for companies with strong cash flows that I expected to pay large dividends. Dividends are never guaranteed, so I would also try to pick firms whose shares I find attractive even if, for example, they stopped dividends.
One such company is Unilever. The yield is 3.5%. So a £250 investment would have a prospective payout of around £8.75 a year. With its strong brands, global reach and pricing power, I think Unilever demonstrates the characteristics favoured by investor Warren Buffett.
I would put my other £250 into British American Tobacco. Yielding 7.5%, I would hope for an annual payout of around £18.75 a year. This company also has strong brands and large free cash flow. But risks include the decline in cigarette usage in many markets and increased regulation, which would hurt sales.
Growth shares
If I decided to put £500 into growth names among UK stocks, I would take advantage of the recent price dip in S4 Capital. I would put half my pot into the digital ad agency’s shares. The company recently upgraded its already aggressive growth forecasts.
I would put the other half of my funds into software group Kainos. With a price-to-earnings ratio of 83, this UK share doesn’t look cheap to me. However, I think the Kainos installed client base and strong reputation could help it grow further.
There are risks though. Both S4 Capital and Kainos operate in crowded markets and need to work hard to stay ahead of the pack.
UK stocks to tuck away
What if I wanted to park my £500 in UK stocks and not think much about them for years or even decades?
One option would be drinks maker Diageo. It outlined its plans today to return billions of pounds to shareholders. I like its strong brand portfolio, which gives it pricing power. But one risk is health-conscious consumers reducing alcohol consumption.
For my other £250 I would choose Spirax-Sarco. The specialised engineering group also has pricing power. Its mission-critical products mean customers are more likely to pay for quality. However, demand is linked to economic activity, so any further slowdowns in the economy could hurt sales.
