How I’d invest a £20k Stocks and Shares ISA to build a £500k savings pot

Picking high-quality shares could supersize a Stocks and Shares ISA. Our writer explores what it might take to reach this ambitious goal.

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On 6 April, a new allowance year begins for Stocks and Shares ISAs. And this is my highlight of the month. I get to add fresh cash to my tax-free investment pot.

But to reach a £500,000 ISA pot, it’s going to take a lot more than just one year’s allowance. Given the average stock market return over the long term is around 10%, I calculate it could take 13 years to reach my goal.

That said, I typically aim for greater returns by carefully selecting a basket of quality shares. By doing so, I expect to reach my target sooner.

There are thousands of potential shares listed on the London Stock Exchange. But only a few dozen will meet my rigid criteria.

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.

Stocks and Shares ISA criteria

Safety first. I only want to own shares in companies that have sound balance sheets. If there’s a risk of insolvency, I discard it immediately.

I prefer high-quality shares. By this I mean profitable businesses with growing cash flows. More specifically, I’d filter for profit margin and return on capital employed to both be above 10%.

It’s important not to capture overly expensive shares. That’s why I look for a price-to-earnings growth ratio of less than 1.5.

Just these few criteria reduce my stock universe down to just 24.

From here, I can look closer into the businesses to find a suitable selection to own. I’d aim to own around 10-15 shares. By doing so, it would spread some risk and I wouldn’t be putting all my eggs in one basket.

My top pick right now

One share that sticks out to me right now is Warpaint London (LSE:W7L). It has a market capitalisation of just £325m. Smaller companies like this are often seen to be riskier than big-cap ones. But they can typically grow faster. This one is one of the most compelling investments I’ve seen in a while.

It meets all my criteria listed above. In addition, it offers a dividend yield of 2.7%. That might sound small, but given this is a growth share, I should be grateful it offers any dividend at all.

Also, as earnings grow, I suspect its dividend could rise too. Indeed, it has grown payouts by 19% a year over the past four years.

Soaring sales

Warpaint might sound like it’s in the paintball activity business, but far from it. It sells affordable branded cosmetics to major retailers and via its own website.

Sales for 2023 are expected to be around £89.5m, a 40% jump from the prior year. Growing sales are being driven by launches in new stores and new retailers. And it’s expecting to expand further this year.

Bear in mind that it operates in a competitive industry that tends to have significantly larger marketing budgets than Warpaint. But for now, sales and profits continue to grow nicely.

Its share price has doubled over the past year, but I think it’s just getting started.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel has positions in Warpaint London Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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