My Stocks and Shares ISA is always my first choice when I have cash to invest, as it allows me to benefit from tax-free income and capital gains.
Right now, I’m looking for investment ideas that can deliver a market-beating income and future capital gains. I think I’ve found two stocks that could fit my requirements.
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.
Big dividends from supermarkets
My first choice is FTSE 250 property specialist Supermarket Income REIT (LSE: SUPR). As the name suggests, this investment trust owns supermarkets sites and leases them to big retailers.
Tesco and J Sainsbury are this REIT’s largest tenants, and the risk of them failing to pay rent on time seems pretty low.
Despite this, Supermarket Income’s share price has fallen by around 40% over the last two years. This slump is mainly due to the impact of higher interest rates.
Investors are worried that when Supermarket Income refinances its loans, higher interest rates could wipe out profits (and dividends).
That’s certainly a risk for some REITs, but I don’t think it’s very likely here.
Supermarket Income’s debt costs look comfortable to me, and its properties are usually on long leases. Rents are often linked to inflation, too.
Large supermarkets rarely close or change location, so I don’t expect many empty properties.
This two-year slump has left Supermarket Income trading at a 15% discount to its 88p book value, with an 8% dividend yield.
If interest rates fall, then I’d expect Supermarket Income’s share price to move closer to its book value. In the meantime, I think this stock offers a relatively low-risk opportunity to lock in an 8% income.
Private equity with a 7% yield
As a private investor, I can’t easily invest directly in private companies. That rules out a whole chunk of the global economy – including many smaller and faster-growing businesses.
Fortunately, there are a number of investment trusts that allow small investors like me to get exposure to private companies. One example is Apax Global Alpha (LSE: APAX). This FTSE 250 investment trust gives investors access to funds run by leading private equity firm Apax Partners.
The trusts’ investments are focused on four sectors – tech, services, healthcare, and internet/consumer. In my view, these are all attractive areas for long-term growth.
Right now, the trust’s stock is trading around 25% below its March 2024 book value of 217p per share.
Admittedly, this discount reflects some risks about the outlook for private equity. Rising interest rates mean it’s more expensive to borrow money to fund new investments. At the same time, potential sale prices for some current investments may be under pressure.
Even so, I think this gap is likely to narrow over time, especially if interest rates fall. That could generate a tidy capital gain for patient shareholders.
There’s no certainty of this, of course. But the trust’s dividend does seem quite safe. Management recently fixed the payout at 11p per share, giving a yield of just over 7% at the time of writing.
Equity investments always carry some risk of losses. But Apax has a long track record and I like the trust’s balanced approach to shareholder returns. Overall, I think the shares look good value at the moment and could be a good way to diversify a UK share portfolio.
This post was originally published on Motley Fool
