Every year, a Stocks and Shares ISA allows UK investors to protect up to £20,000 worth of investments from dividend taxes. It’s something I’m always looking to take advantage of.
I think there are some great opportunities for dividend investors in July, but there are also some important principles to stick to. Here’s how I’d invest £20,000 to boost my passive income.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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Buy low
Possibly the most important part of investing is buying shares for less than they’re worth. And the best chance of doing that, in my view, is to look at stocks in sectors that are out of fashion.
My approach involves trying to find situations where a stock is being weighed down by a negative short-term outlook. This can mean there’s an opportunity as things get back to normal.
There are a couple of important caveats, though. First, stocks sometimes fall out of favour for a reason – a low share price and a big dividend yield can sometimes be a sign of trouble ahead.
Additionally, the fact that a stock has been falling isn’t a sign that it won’t continue to fall. I’m looking to buy shares when they’re low enough, not necessarily when they’re at their lowest.
From a passive income perspective, how much I can sell a stock for doesn’t matter. What matters is how much cash the business is going to distribute and how much it costs to buy its shares.
Diversification
Investing is an essentially unpredictable business. The best way to mitigate this, in my view, is by owning a diversified portfolio of stocks.
For example, high inflation in the UK might be a headwind for FTSE 100 stocks. But it’s less likely to be an issue for shares in companies based in the US.
The difficulty here – as Warren Buffett notes – is that it involves trying to find more opportunities. In order to diversify a portfolio, I’ll need to be able to think about a broad range of different stocks.
That’s a genuine challenge. But I think it’s one worth attempting, especially if I was looking to invest my entire ISA contribution for a year in a relatively short space of time.
Stocks to buy
So which stocks would I look to invest in? There are quite a few that stand out to me at the moment.
The real estate sector has been hit hard in both the UK and the US. As a result, shares in Primary Health Properties and Federal Realty Investment Trust look good to me.
In both cases, rising interest rates present a risk of rent defaults. But these companies own high-quality properties, so I think they’ll be able to maintain good metrics over time.
I’d also look to buy shares in Unilever and Kraft Heinz. Rising interest rates have been pushing down share prices and driving up dividends in both companies.
Inflation – especially in the UK – remains a risk with these stocks. But I don’t see anything in either company to justify their share price declines since the start of the year.
As a result, I’d look to buy both at today’s prices. By investing £5,000 into each stock, I’d look to build a diversified portfolio that can generate meaningful passive income for years to come.
