A Stocks and Shares ISA can be a great tool for people to consider using for their investments. UK investors pay no dividend or capital gains tax from the stocks they buy and sell within the ISA. For someone just starting out and opening an ISA, here are three ways to try and build a robust portfolio that can withstand volatility over time.
Allocation to defensive shares
Defensive stocks often come from sectors such as consumer staples and utilities. Companies that provide goods and services are seen as necessities. As a result, revenue and profitability shouldn’t be materially impacted during a recession. Therefore, these stocks often perform better than consumer discretionary and other similar sectors during a volatile period.
By considering allocating a portion of ISA funds to defensive shares, an investor can look to smooth out volatile performance in the portfolio. Of course, such stocks are unlikely to provide huge share price gains. But they can help to protect an ISA over time.
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Diversify in different ways
Holding a number of different shares in a portfolio is a great way to reduce risk. After all, with a dozen stocks when one has a problem, the impact is less than if I only held that share.
However, some investors forget about diversifying in other ways. For example, having exposure to companies around the world, instead of just UK ones, including stocks trading in the US, or with a big base in Asia. If the UK struggles, the portfolio shouldn’t necessarily underperform.
Make smart use of income stocks
Some investors think that when they get paid a dividend, the best thing to do is take the money and spend it. It’s true that this is an option, but when trying to build a strong ISA I believe there’s a better option.
Any income that’s received can be used to buy more of the same stock. This means that even during a period of high volatility when stock prices are falling, the dividend money can be used to buy at a lower price, without having to add more cash to the ISA! Over time, this can provide a better blended average purchase price, and acting to smooth our share price swings.
An idea to think about
An example of a stock worth considering for is PayPoint (LSE:PAY). The FTSE 250 stock has a current dividend yield of 4.75%, with the share price up a whopping 90% over the past year. Even with this, the price-to-earnings ratio is 12.75. Although it’s above my fair value benchmark of 10, I wouldn’t say it’s anywhere close to being overvalued.
It pays out quarterly dividends, which gives frequent opportunities to receive cash. Not only that, but I’d also classify it as a defensive stock. The business provides payment services, with a strong footing in the UK for retail transactions. Regardless of the state of the economy, payments will still be flowing during good times and bad.
One risk is that net debt is increasing, with the half year report showing it ticking higher to £86.8m. This was due to making more investments to fuel growth, which is understandable but it does need to be careful.
On balance, I think it’s a stock that investors could consider for inclusion to help build a robust ISA.
