A Stocks and Shares ISA is a terrific way to build wealth for the future. It allows investors to put up to £20,000 a year in the stock market, and take all their returns free of income tax and capital gains tax, for life.
Stock markets may be volatile but I think today is a great time to load up an ISA, because there are so many top UK shares trading at rock bottom valuations. Some of them are deservedly cheap, for example BT Group, which trades at just 6.12 times earnings. The company has huge debts and an unwieldy pension scheme, two problems that will prove difficult to resolve.
I wouldn’t buy the telecoms giant but there are plenty of FTSE 100 companies trading at similar valuations that I would pop into my portfolio today.
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Shopping for bargains
One of them is energy group Centrica. Its share price has rocketed 124% in the last year, yet it still trades at a meagre 4.5 times earnings. As well as owning British Gas, it’s also a gas and oil producer, and has benefited from the soaring oil price.
I’m a little wary of buying any stock after such a strong run. However, given the tragic events in Gaza, I think the oil price could stay high for sometime, boosting the Centrica share price.
Barclays shares are also dirt cheap, trading at 4.94 times earnings. Like the other UK banks, it’s been hit by rising interest rates and fears of falling house prices. When the rate cycle turns, its shares could finally take off. While I wait for that happy day, I’d enjoy my 4.74% yield.
Mining giant Anglo American trades at just 5.5 times earnings and has an incredible yield of 7.27%. Its shares have been hit by rising interest rates and falling demand from China, and a substantial drop in diamond sales at subsidiary De Beers.
I wouldn’t buy this stock anticipating an instant recovery. The world has too many troubles. But when the global economy does recover, I’d expect ultra-cheap commodity stocks like this one to lead the charge. They usually do.
I’m thinking long term
Insurer Phoenix Group Holdings has been hit by stock market volatility, which has hit the value of the assets it holds to fund insurance payouts to customers.
It trades at just 5.7 times earnings and incredibly, yields 10.96%. Double-digit dividends are rarely sustainable but this one might be. Even if it’s trimmed, it should remain pretty generous.
My final FTSE 100 stock pick is also a bit risky, housebuilder Barratt Developments. House prices have dipped by around 5% so far, and unless interest rates peak soon, they could have much further to fall.
I think much of the risk is reflected in its valuation of 6.2 times earnings, while the reward comes in the shape of its 8.03% yield. Again, that may not prove sustainable if we get an extended property market downturn. Time will tell.
To protect myself against the risk of buying shares in today’s volatile market, I’d aim to hold these for a minimum five years, and ideally much longer. Over the years they should compound nicely, with luck, tax-free inside my Stocks and Shares ISA.
