The stock market is a rather uncertain place at the moment. So with a spare £1k, I want to be selective in where I look to allocate my money. Given the tax benefits, it makes sense for me to invest via my Stocks and Shares ISA. To take advantage of both my ISA allocation and the current opportunities, here’s where I’m thinking about putting my cash.
Picking up dividends from finance
The first area is financial services. My focus on this sector is actually related to dividend payouts. During the current period of high inflation, picking up sustainable income from stocks is an aim of mine. Sure, the current yields won’t completely offset inflation, but it certainly is a lot better than taking the full impact of it!
For example, if I invest some of my £1k equally between Legal & General, Aviva, and St. James’s Place, I’d have an average dividend yield of 5.50%.
The benefit of having these income stocks in my ISA is that I don’t have to pay any dividend tax. Usually, after I reach my allowance limit (£2k), I have to pay tax on any excess dividends for the rest of the year. This doesn’t apply for stocks in my ISA.
Supermarket stalwarts for my Stocks & Shares ISA
Another sector I’d park some of my money in is supermarkets. Following the Bank of England’s gloomy forecasts for 2023, I want to have some stocks that will have strong demand regardless of consumer income levels.
Supermarkets such as Tesco and J Sainsbury fit the bill in my opinion. I’d stay clear of more high end options and go for the middle-bracket companies. I feel both options give me a defensive tilt to my ISA that can help to protect me in the coming year.
One risk I’m aware of is the thin profit margins. Over the past five years, the Tesco operating profit margin has ranged between 2.9% to 4.6%. The implications of this is that with only a small swing in higher costs, this profit could turn to a loss.
Hot lithium stocks
Finally, to try and turbo charge some potential profits, I’d look to commodity stocks for growth potential. Given that the bulk of my £1k has gone on relatively conservative options, I’m happy to allocate the rest to some higher risk ideas.
I recently wrote about European Metal Holdings and Trident Royalties. These are two companies with interests in lithium. Lithium should have long-term potential, due to the commercial use in batteries.
My ISA is a good home for these due to not having to pay capital gains tax. If either option really does explode in coming years and I can sell for a healthy profit, I don’t have to pay away a chunk to the taxman.
The concern with this sub-sector is that lithium mines are mostly at early stages. So if extraction turns out to be harder than expected, or flops completely, it’s game over.
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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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) 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.