How I’d look for cheap shares to buy for an empty ISA, before it’s too late

With the Footsie rising, there are fewer dirt cheap shares around. I want to buy as many as I can in my ISA while I can still find them.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has been above 8,000 points for about a month now. Are the days of cheap shares over?

Well, in the past 10 years, the index has risen just 23% — with about half of that in 2024 alone!

Dividends would add a bit. But it still looks like a poor 10-year ride compared to long-term average Footsie returns of about 6.9% per year.

Nearly double

That should compound to a 95% rise every decade. And it suggests FTSE 100 shares are still relatively cheap, even after this year’s gains.

I’ve made no use of the new Stocks and Shares ISA allowance so far. But that’s only because I haven’t had the cash yet. When I do, I’ll be buying as many cheap shares as I can.

Dividend yields are still high, so that’s my starting point. And I might pick my first buy from a cyclical sector that I think has fallen below the radar.

Cyclical dividends

Not long ago, mining stocks like Rio Tinto (LSE: RIO) had very big yields, and everyone wanted them. Then the sector turned down as world inflation soared and Chinese demand slowed.

But cycles like that are common. And commodity prices can vary a lot.

How can the long-term demand for copper, iron, and all the rest of the earth’s goodies not be strong? Nobody will be building much without them.

Forecast value

Today, we have a forecast dividend yield of 5.9%, and a forward price-to-earnings (P/E) ratio of 10.3.

Commodities prices are still a bit weak. Iron ore, for example, is way down on peak 2021 prices. And that’s the main risk. Rio and similar companies have no control over world prices, and can suffer in a downturn.

But I see a low valuation, and I’d buy Rio in anticipation of stronger future demand.

Beware value traps

Excess dividends can destroy value though. For years, BT Group and Vodafone paid out big cash that wasn’t covered by earnings. Investors noticed, and the share prices fell slowly and steadily.

There’s no such thing as a free dividend, and shareholders paid with capital losses.

The inevitable happened with Vodafone, and its 10% yield will be cut in half next year. BT, meanwhile, might have turned things round after just posting a nice set of results.

Both of these could be ISA candidates for me now, but neither is out of the woods yet. I’ll keep watching.

More essentials

What all these stocks share is that they provide essential goods and services. And that’s where I look for more value in cheap stocks.

So I might buy Tesco or Unilever ahead of anything in the leisure business, like holiday airlines or fashion brands.

And I’d always want at least one bank or other finance stock in my ISA. Finance is as essential as food and drink, and no business or economy can work without it.

Fill that ISA

Whether I’ll buy any of the stocks I mention here, I have yet to decide. It’ll depend in part on valuations at the time.

But with an untouched ISA limit waiting for me, I relish the search for cheap shares while they’re still there.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc, Unilever Plc, and Vodafone Group Public. 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.

More on Investing Articles

Investing Articles

Turning a £20k ISA into a stunning £38,023 a year passive income

Harvey Jones says investing regular sums in a Stocks and Shares ISA is a brilliant way of building up a…

Read more »

Growth Shares

Growth stock YouGov just fell 46%. Time to buy?

YouGov’s share price just fell from 820p to 440p after a poor trading update. Is now a good time to…

Read more »

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »