The Motley Fool

Story by Jon Smith

The new Stocks and Shares ISA year kicked off last week, meaning I now have a new £20k allowance to make use of for the next year.

Even though I’ve held an ISA for a long time, some will be starting from scratch right now. So if I was in that position and wanted to target passive income as my investment goal, here’s what I’d do.

Principles to remember
To begin with, I wouldn’t invest everything all in one go. The beauty of the ISA is that the allowance is over the course of a year. I’m not penalised if I invest in regular chunks each month.

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.

This helps when I’m trying to build up good options for passive income. Stocks that pay out dividends do so at different points during the year. So for a company that only delivers one payment annually, it might make sense to buy it at a certain point during the year.

Further, a stock’s dividend yield fluctuates due to the moving share price. This means opportunities to buy will present themselves during the year. So by investing regularly instead of all in one go, I can capture more opportunities.

My final note would be to diversify my exposure around different sectors. This will help me to build a robust portfolio that can withstand a shock. This could occur to one specific company, or to an underperforming sector. My income will take a hit from this, but it won’t be anywhere near as hard as if I just held that one stock (or one sector).

A banking idea
A good example of a stock I’d include in a fresh ISA is Barclays (LSE:BARC). With a dividend yield of 4.14%, it’s above the FTSE 100 average of 3.66%. Granted, this isn’t what I’d classify as an ultra-high yield option.

Yet for my ISA, I want solid stocks I believe will pay out dividends and grow them in years to come. That’s the position I believe Barclays is in. The bank has benefitted from higher interest rates over the past couple of years. In 2023, it recorded the highest revenue in over five years. The dividend per share payments also grew from 6p in 2021 to 7.25p in 2022 and 8p last year.

Granted, cuts to interest rates this year could negatively impact earnings. Yet I’m not sure that we’ll see as many cuts as people think, given the fact that inflation is remaining a bit sticky.

Let’s not forget that the share price is up 27% over the past year. Any gains here further help to boost my overall profits.

Building up income
I’d happily include Barclays in the ISA portfolio. From there, I’d then be more confident to buy a high-yield option that carries more risk to help raise the overall yield.

If I included options from other sectors including Imperial Brands (8.47%), Greencoat UK Wind (7.48%) and Bakkavor Group (6.56%), I think I could get an average yield of around 6.5%. If I invested a starting sum of £5k and then put £500 a month in my ISA, my income would start to build. By year 15, I could be making just over £10k a year from dividends.

Remember they are realised profit and losses, some of the Trusts are in the current portfolio so hopefully some of the losses can be clawed back, alternatively the profit could be lost before any Trust is finally sold.

The plan remains the same.

To own Investment Trusts to earn dividends to buy more Investment Trusts that pay a dividend. Stick to your task until it sticks to u.

Hopefully more profits to come subject to jam down.

I’ve sold 88 shares in AEI for a profit of £250.00 as I want to explain an important point.

Prior to the sale

Intra profit of £448.00

(Unrealised profit of £254.15 Realised profit of £193.85 dividend )

After the sale

Unrealised profit of £187.87

Realised profit of £328.88 (dividend plus sale profits)

Unfortunately u can’t decide to sell x number of shares and take the profit. The buying price was 280p and the selling price 290p, the 10p profit per share, less trading costs is spread over all the shares including the remaining shares, where the profit can disappear as fast as snow on a summer’s day.

Simpler to understand is a profit is not a profit until it sits in your account as cash. I know of one trader who has a very successful trading history often buys two equal positions so he can sell one position and book all the profit for his blog.

One final point the AnnualRateofReturn ARR, which u often seen quoted on the trade was 35% which is meaningless.

No guarantees but whilst the NAV is rising the price should follow and hopefully start to close the discount to NAV. If not u still have the 8% yield to keep u warm.

I made a dummy trade with AEI, which is not the same as a trade for dummies, and I was offered a sell price of 285p, which I declined. At that price the thread position was a profit of £310.00, which includes a dividend of £162.00. This gives me the following options.

Sell the whole position and re-invest in a higher yielder.

Take out the profit of £148.00 and hope to make more, with trading costs having fallen it would be an option. For me, remember u are not me as your portfolio may be at a different stage, it’s a strong hold with a target of crystallising the profit only, very roughly £300 of profit plus the dividend.

All subject to the well known investing cliche of jam down (where the worst outcome is if u drop your toast/jam it will land jam down, where if it landed jam up and no one was watching u could still eat it.

GL

Some Investment Trusts have wide spreads (buy/sell price), especially first thing in the trading day. It’s very important that u check the spread before u trade.

U can often trade within the spread but many platforms allow u to make dummy bids and u can see if u want to buy/sell or wait and see if the spread narrows.

ABRDN DIVERSIFIED INCOME AND GROWTH PLC

REDEMPTION AND CANCELLATION OF 6.25 PER CENT BONDS DUE 2031

Bond Redemption

The Board of abrdn Diversified Income and Growth plc (the “Company“) hereby announces that, following the agreement of shareholders to the proposal to put the Company into managed wind-down, the Company redeemed and cancelled the remaining £16,096,000 in aggregate principal amount of its 6.25% Bonds due 2031 (ISIN XS0134340180) (the “Bonds”) on 9 April 2024.

As announced on 8 March 2024, the redemption price was 114.983%. The redemption price having been calculated in accordance with the conditions, using the gross redemption yield of the United Kingdom 6% Treasury Stock due 7 December 2028.

Application has been made for the admission of £16,096,000 in principal amount of the Bonds to the Official List of the United Kingdom Listing Authority to be cancelled in accordance with the FCA’s Listing Rules.  Following this redemption and cancellation there remain no further Bonds outstanding and the Company has no further debt.

Expected circular and approvals

The Company has commenced the process required for Court approval for the shareholder approved reduction in the nominal value of the Company’s ordinary shares from 25 pence per ordinary share to one penny per ordinary share (the “Capital Reduction“) and cancellation of the entire amount standing to the credit of the Company’s capital redemption reserve (the “Capital Redemption Cancellation“) and share premium account to create distributable reserves which may be applied in any manner permitted by the Companies Act and/or the Company’s  articles of association (including for any bonus share issues and/or redemptions, tender offers, share buy backs and/or other returns of capital) excluding (in respect of the Capital Reduction and Capital Redemption Cancellation) the payment of dividends.

The Company also expects in the coming weeks to issue a further circular providing details of the expected initial capital return, which is proposed to be carried out by way of an issue and redemption of bonus shares to all shareholders (the “B Share Scheme“), including a summary of the UK taxation consequences for shareholders.  The circular will convene a general meeting to seek the further shareholder approvals required to be granted for the implementation of the B Share Scheme.  Subject to these further shareholder approvals being granted and the required Court approvals being received, it is expected that the initial return of capital will be implemented around the end of June 2024.

££££££££££££££

Current discount to NAV 31%. A strong hold as we await developments.

U want to start investing but do not now where to start as u don’t want to lose your hard earned.

One option is a World Wide Tracker, VWRL is the working example but there are others to choose from.

Bull points.

As long as u can choose when to sell, u will not lose your money.

Modest dividend for re-investment.

Multi years when the share price is flat lining, which is a plus if u want to add funds as they are available.

Bear points.

No reserves so the dividend is variable.

The modest dividend is not the main reason to buy the ETF

ETF’s trade around their NAV so no discounts to NAV.

Multi years when the share price is flatlining, so like watching paint dry.

Once u have made a capital gain, u could sell the position and re-invest in the Snowball or take out the profit to do the same. Or buyback the shares u sold higher up and do it all over again. Remember a profit is not a profit until it sits in your account as cash.

I must emphasise that it’s likely after u buy, especially after a strong rise in the price, that u will lose money. So only money u don’t need and when u can choose when to sell.