The tax advantages of a Stocks and Shares ISA mean that it is the perfect vehicle to own income and growth investments. Income or capital gains earned on assets held within one of these wrappers is entirely tax-free. I try to take advantage of this strategy by acquiring dividend growth stocks and investment trusts.
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.
Investment trusts can be great income investments. These investment companies can hold back a portion of their income every year and use this to cover their payouts in periods of economic stress.
For example, in 2020, when multiple UK companies had to cut their dividends to preserve cash in the pandemic, many investment trusts could dig into this reserve to maintain and even boost their payouts.
Leading investment trust
One of the trusts with the best income track records on the market is the Law Debenture Trust (LSE: LWDB).
This investment company is one of the top holdings in my Stocks and Shares ISA. It is more than just an investment enterprise.
As well as owning a portfolio of stocks and shares, the enterprise also owns a corporate and pensions services business. It helps other companies manage their pension infrastructure and their corporate structures.
This kind of business is relatively sticky. Changing providers can be a time-consuming and complex process. In the meantime, Law Debenture can earn a steady recurring revenue from its clients.
The group can use revenue from this division to support its dividend and provide funds for the investment portfolio. The structure gives the company a unique edge. Rather than focusing on income stocks, it can take a longer-term view and invest some cash in growth investments.
Indeed, one of the best-performing stocks in its portfolio over the past couple of years is the hydrogen fuel cell group Ceres Power.
Stocks and Shares ISA holding
The one downside of the company’s investment strategy is the fact that more than 80% of the portfolio is invested in UK stocks. This could hold back returns if the UK market underperforms global equities over the next couple of years.
It has undoubtedly held back performance in the past few years, as the UK equity market has struggled to match the performance of international peers. This is why I own the trust alongside a portfolio of other international investments in my Stocks and Shares ISA.
Still, despite this drawback, I think the company offers a unique business model that cannot be found elsewhere.
The investment trust and the operating business combination give the firm plenty of flexibility and extra cash to support the dividend. The stock offers a dividend yield of around 2.8%. The trust also charges a relatively inexpensive management fee of 0.5%. Compared to some funds that charge fees of 1% or more, this appears good value for money.
