I think that a Stocks and Shares ISA is a great vehicle for investments. If I were investing £20,000 today, I’d look for stocks that have scope to be worth significantly more in future than they are now.
As I see it, there are four things that increase the value of a company’s stock. I’d look for investments that could benefit from each of these.
Revenue growth
The first way for a company’s stock to be worth more is for the company’s revenue to increase. Other things being equal, that means that the business generates more cash for its shareholders.
A good example of this is Halma. Over the last 10 years, the company has increased its revenues by an average of around 9% per year.
As a result, the Halma share price has increased by 371% since 2013. Since I think this company can continue to grow its revenues, it’s one I’d be happy to buy for the future.
Margin expansion
Even if a business doesn’t increase its revenues, it might still generate more cash. That comes as a result of the company’s margins expanding.
McDonalds is a great example of this. Over the last decade, the company’s revenues have been largely stagnant, but it has improved its operating margins from 30% to 43%.
Consequently, McDonalds shares have gone from $96 in 2013 to $273 right now. If this can continue, I think the share price can go higher still, which is why I’d buy it in a Stocks and Shares ISA today.
Share buybacks
Share prices can also push a company’s stock higher. When a company buys back its own shares, the number of shares outstanding decreases and the future earnings attributable to each share goes up.
One of Warren Buffett’s favourite stocks — Bank of America — illustrates this quite well. The company’s share price has gone from $11 to $36 over the last 10 years, despite modest revenue and margin growth.
This is due to the number of Bank of America shares outstanding declining by 25% over the last decade. As a result, the earnings attribute to each share has increased, pushing the share price higher.
Dividend increases
Lastly a company’s share price can go up because it increases the dividends it pays its shareholders. Diploma is a stock I own that illustrates this quite well.
The company has increased its dividend per share by an average of 11% per year over the last 10 years. I think that’s quite significant. As a result, the company’s share price has gone from £5.65 to around £27.
Diploma’s size means I think it can continue to support its dividend growth. That’s why I own the stock in my portfolio and why I’d buy it if I was investing in a Stocks and Shares ISA today.
Diversification
If I were deploying £20,000 in my Stocks and Shares ISA, I’d buy these four companies. Concentrating my portfolio seem risky, but I think that these investments offer reasonable diversification.
These four stocks offer a balance of different industries, sizes, and geographies. Even with only a few great investments, I can still limit my risk by diversifying.
