Investing with a Stocks and Shares ISA in 2023 may seem like a risky move. After all, there’s still plenty of uncertainty plaguing the economy. And with the cost of capital rising, businesses are finding it significantly more expensive to raise external funding.
However, plenty of top-notch enterprises are still generating surplus cash flow, despite the clamp down on consumer spending. And even though the UK’s flagship index, the FTSE 100, has already recovered from the 2022 stock market correction, plenty of companies haven’t been so fortunate.
In other words, some bargains may still be there. With that in mind, let’s explore why I think drip-feeding £500 each month in 2023 could be a lucrative move in the long term.
1. Bargain valuations
During periods of stock market volatility, investment decisions are seldom made based on rational thinking. Research by behavioural finance institutes has long since proven that the pain of loss is significantly more potent than the thrill of gains.
So it’s hardly surprising that when the market takes a turn for the worse, most investors make the mistake of panic-selling anything with a pulse. And that includes high-quality businesses largely unaffected by the economic factors dragging investor sentiment down.
Fortunately, this means more thoughtful investors can now add some terrific businesses to their Stocks and Shares ISA at bargain prices.
Of course, buying during volatility can be risky. Discounted shares may get even cheaper if investor sentiment continues to fall. That’s why drip-feeding £500 every month, rather than investing all in one go, is likely the more sensible approach.
Suppose I buy cheap-looking UK shares today, and they continue to fall? In that case, I can now buy more at an even better price.
2. Higher dividend income
Another by-product of low valuations is higher dividend yields. Plenty of FTSE 100 stocks now offer yields above the index’s historical average of 4%. And for patient investors, this can unlock an impressive stream of passive income in the long run.
It’s important to remember that, in some cases, a high yield might be a trap. Don’t forget dividends are optional payments for companies. And if there’s no cash flow to fund them, a high yield today could drop significantly in the future. Consequently, it’s critical investors investigate a high payout thoroughly before opening or bolstering a position in their ISA.
3. ISA tax benefits
Investing through a Stocks and Shares ISA can often be more expensive versus commission-free trading platforms. They usually come with annual account fees and higher transaction costs.
But ISAs have one critical advantage that makes up for this. All capital gains and dividends received are free from tax.
Depending on which tax bracket an investor falls into, an individual can reduce their investing expenses by up to 20%. Beyond accelerating the compounding wealth effect, if a portfolio reaches six- or even seven-figure territory, this tax immunity can make a world of difference.
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.