How I’d invest £5,000 in a Stocks and Shares ISA

A common way to invest in equities is through a Stocks and Shares ISA. But one doesn’t have to use the full allowance. Let’s say I had £5,000 to put in an ISA today. Although it’s only a quarter of the typical ISA allowance, I still reckon I could build an attractive, diversified portfolio of holdings. Here’s the approach I would take.

Eggs in different baskets

First I would think about my risks. Even the best company can suffer unforeseen challenges. So I would try to reduce my risk by diversifying between different companies and types of business.

I reckon £5,000 would work well in this regard. I could split £5,000 across a handful of companies, putting £1,000 into each.

Investment objective

Then I’d decide whether my objective was growth, income, or both.

Again, £5,000 is a big enough sum that I don’t necessarily need to pick one or the other. I would focus more on income but also aim for some growth. So I would split the funds 60:40. That means picking three income choices and two growth names for my Stocks and Shares ISA.

The two aren’t mutually exclusive: sometimes income shares like Judges Scientific also turn in strong share price growth, while a growth pick such as Apple turns out to be a sizeable dividend payer. But I still find it helpful to focus on one or the other when looking at a particular share. That helps guide my thinking on whether a share will fit into my portfolio.

Income choices

There is no shortage of income shares I could pick for my Stocks and Shares ISA. I’d put £1,000 into each of Imperial Brands, Legal & General, and Rio Tinto.

Imperial Brands appeals to me because of its massive cash flows and 8.9% yield. There are risks, notably lower cigarette purchase rates leading to a fall in revenues and profits. With one of the highest yields among FTSE 100 stocks, I’d spend £1,000 on Imperial Brands.

Legal & General has a more modest yield, at 6.1%. But I like its strong brand recognition among customers. It plans to keep raising the dividend for the next several years. That isn’t guaranteed, though. One risk in the current inflationary environment is higher claims costs hurting profits.

My third pick, miner Rio Tinto, offers an even juicier income, yielding 11.1%. The big risk here is the cyclical pricing of minerals. In time, if prices fall, both revenues and profits could fall sharply. The dividend may well suffer. But for now, I like the double-digit yield and would add it to my ISA.

Growth picks

I would also invest £1,000 in each of two growth picks for my Stocks and Shares ISA.

Shares in S4 Capital have tanked today after the market reacted poorly to its third-quarter trading statement. There is a risk that increased spending on technology could hurt future profit margins. But the statement was upbeat overall. The company still aims to double revenues and profits over three years.

My other growth pick is Renalytix. The kidney diagnostics specialist has seen 75% share price growth in the past year, at the time of writing this article earlier today. But with a growing sales force and increasing number of contracts, I remain upbeat about the its growth prospects. One risk is that competitors’ products could undercut Renalytix on price, hurting profit margins.

Christopher Ruane owns shares in Imperial Brands and S4 Capital. The Motley Fool UK has recommended Apple, Imperial Brands, and Judges Scientific. 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.