Investing in a Stocks and Shares ISA is my favourite way to access the stock market. It’s tax efficient and allows me to take control of my future finances. If my chosen stocks pay dividends or achieve capital growth, I don’t have to pay capital gains tax. I also don’t need to declare any income taken from my ISA on my tax return.
Why invest in an ISA
There’s an annual allowance for an ISA, this is currently £20,000. This means I can invest up to £20k into my ISA this year. I can put in as little as I please, but £20k is the maximum threshold.
I think this is great because many investors can’t afford to allocate the full allowance but can afford a small amount each month. Getting started in investing is a major step to achieving financial freedom. Therefore, small steps can gradually amount to big future gains.
If I had a spare £1,000 to invest in my ISA, I’d first look to the FTSE 100 to find a dividend-payer. That’s because dividends help grow capital through compounding.
£1,000 in the FTSE 100
One FTSE 100 stock I would consider is Smurfit Kappa (LSE:SKG). There are many stocks I like, but this has dividend power, and in my opinion should be able to deliver slow steady growth. These are two attributes I look for when adding to a diversified long-term portfolio. And that’s why I’m drawn to this world-leading paper packaging stock.
SKG’s price-to-earnings ratio is 17, earnings per share are £1.97 and its dividend yield is almost 5%. In 2020 its revenue fell 6% year-on-year, because of the pandemic. But free cash flow rose 23% to €675m. Plus, its net debt-to-EBITDA ratio fell to 1.6x from 2.1x. Anything under 3 is generally acceptable, so I think the reduction is a very encouraging sign as a potential investor.
Europe’s leading corrugated packaging company is in a prominent position to capture the growing packaging market as the e-commerce boom continues. To illustrate its intentions to move with the trend, the company is investing €25m in constructing a mega-plant in Poland. It should be completed next year and will help expand its product offering in Eastern Europe.
Some 60% to 70% of its packaging goes to fast-moving consumer goods customers, which is a sector that tends to remain stable in economic downturns. Smurfit Kappa is also working with its customers to help them reduce costs and ship products sustainably.
Another encouraging sign is that the Norwegian state sovereign wealth fund has a 7% stake in the firm and has been a shareholder for over 10 years. Other notable shareholders include BlackRock, Vanguard and various pension funds.
Risks facing Smurfit Kappa shareholders
It doesn’t have a clear run though as Smurfit Kappa has strong competition. DS Smith and Mondi are two other FTSE 100 companies operating in the space.
Plus, its global presence makes it vulnerable to trade tensions and foreign exchange rate fluctuations. Likewise, its manufacturing activities are sensitive to price fluctuations in its raw materials and energy costs.
Yet I want to invest in something that will stand strong far into the future and I think this one will. I’d be looking to hold Smurfit Kappa shares for the next five to 10 years.
