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For many of us, a stocks and shares ISA is an important financial tool. Hopefully, it can help us build wealth.
Just as it makes sense to get a vehicle MOT or a personal health check, I think it makes sense to periodically review an investor's ISA with the aim of trying to increase returns.
Here are five steps I would take to that end.
1. Reviewing investment cases
When buying a stock, consider the investment case. Whether it's in that language or not, that's what happens when someone buys stocks. They are weighing their reasons to buy (or not).
Investment cases can change. The market may have evolved or a company may have changed its strategy.
Periodically reviewing the investment case for each stock you own can alert you to any changes that appear to drive the price (or dividend) down. That can help us make decisions as investors that drive profitability.
2. Letting go of useless emotions
Sometimes we can become emotionally attached to a particular action. That could be comfortable – but not useful – when it comes to increasing the value of an ISA.
By taking a sensible and rational approach to what we have and why, it will hopefully be possible to eliminate some investments that have outlived their purpose but still exert an emotional pull on us.
3. Examine how dividends are financed
A common mistake investors make is buying high-yielding stocks only to see their dividends cut or canceled entirely, causing the stock price to fall as a result.
Owning stocks that maintain or continue to grow their dividends over the long term will hopefully help me earn more from my ISA than buying companies with unusually high yields, only to see them slashed.
So, as an investor, I pay close attention to what a company's free cash flows are and what I think could happen to them in the future, based on their business prospects.
4. Minimize fees and commissions
A simple way to improve my ISA returns is to reduce my expenditure on fees and commissions.
That's why I think it makes sense for me to consider the different stocks and shares ISAs available on the market and choose the one that best suits my needs.
5. Avoid the “good” companies and bet on the big ones
Many shares could give me a decent return in my ISA, but only a limited number offer me a excellent return. Beforehand it can be difficult to know which ones (or all of them would buy!)
So I look for certain characteristics. Take as an example my participation in British American Tobacco (LSE: BATS).
The company ticks many boxes for me. Its market is big. It has a number of competitive advantages within that market, from global distribution networks to a portfolio of premium brands.
To be fair, its balance sheet could contain less debt, but British American is a proven cash generator and has a generous dividend. In fact, the stock yields 8.6% and has increased its dividend annually for decades.
One risk is that demand for cigarettes, while still large, is declining. But British American has been expanding its non-cigarette business. I have no plans to sell this high-income stock!
