A Stocks and Shares ISA can be a great asset for growth investors. But working out what to invest in is also crucial to building wealth over the long term.
I think Rightmove (LSE:RMV) and Games Workshop (LSE:GAW) look like great stocks to consider for an ISA. Both have something important in common that makes them stand out to me.
Tax advantages
Investments held in a Stocks and Shares ISA are exempt from taxes on dividends and capital gains. And that can be a big advantage for overall returns.
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.
With dividends, if I can’t keep all of the income a company distributes to me, I can’t reinvest it. And that can reduce the rate at which my investment compounds over time.
In the case of capital gains, the point of earning a big return on an investment is limited if I have to pay it back in taxes when I come to realise it. That’s why an ISA is important.
Equally though, avoiding taxes on returns is valuable only if an investment generates some meaningful returns in the first place. And the key to this is working out what to invest in.
Rightmove
Rightmove has grown its earnings per share by an average of 9% per year over the last decade. And the stock is up 209% as a result.
Running the UK’s largest property platform doesn’t take much in the way of physical assets. As a result, the company has managed to distribute 79% of its net income as dividends.
I think the business has a decent chance to keep growing its earnings going forward. And that should lead to higher dividends as well as share price gains.
Rightmove’s competitive position is currently under threat from a powerful rival and that’s a risk investors should be aware of. But disrupting the market leader won’t be easy.
While barriers to entry might be low, achieving the kind of scale Rightmove has is likely to be extremely difficult. And that makes me think the stock could be a good investment.
Games Workshop
Over the last 10 years, Games Workshop’s earnings per share have gone from 39p to £4.58. That’s some staggering growth and the result has been a stock that’s up 1,700%.
The company’s biggest asset is Warhammer. And this has had a durable appeal with its followers, which has been extremely valuable for investors.
Like Rightmove, Games Workshop’s business is relatively light on physical assets. That’s why it has been able to grow while paying out most of its net income to investors.
The big question is how far this can continue. Expanding into new geographies has been a key part of the company’s previous growth and this can’t go on forever. Plus it could be vulnerable to new competitors in its market.
Nonetheless, I think Games Workshop has an extremely strong competitive position and attractive unit economics. And that’s why I’ve been buying it for my ISA.
ISA investments
When companies grow while distributing lots of income to shareholders, investors need to be mindful of taxes. And a Stocks and Shares ISA is a great asset here.
I’ve hit my ISA contribution limit for this financial year. But Games Workshop and Rightmove are stocks I’d love to either own or add to in my portfolio for the long term.
