The FTSE 100 is down 22% so far in 2020. It was starting to pick up after its early Covid-19 nosedive, but since June it has been drifting back down again. I think any time is a good time to buy UK shares, but now seems a bit special, with so many bargain buys.
The UK stock market has beaten other forms of investment hands down for more than a century. And with interest rates now so low, you’ll get just nowhere with a Cash ISA.
But if it’s a good time to buy UK shares, which ones should you go for? You need to make your own decisions based on a strategy that appeals to you. But here’s how I’d go about starting a Stocks and Shares ISA now.
Dividend-paying UK shares
At the beginning of 2020, analysts were forecasting a 4.7% dividend yield for the FTSE 100. Some of those dividends have been either suspended or cut back as a response to the coronavirus crisis. But even now, according to AJ Bell‘s Dividend Dashboard, we’re still looking at an estimated yield of 3.6%.
So you could just spread your cash across the top UK shares in a FTSE 100 index tracker, and take the dividends. That 3.6% return is still only a forecast, but I’d be surprised if it turns out to be over-optimistic – especially as we’re seeing signs of dividends being reinstated. And if FTSE 100 share prices recover over the next couple of years (and I fully expect them too), you could enjoy some nice gains there too.
Beat the index
But you should be able to do better than the index’s 3.6%. I’d beat it by buying individual UK shares, and go only for those paying, or expected to pay, decent dividends. I think housebuilders like Taylor Wimpey are among the most undervalued dividend stocks right now.
Then there’s the likes of British American Tobacco with a forecast yield of around 8.5%, National Grid on 6%, and GlaxoSmithKline on 5.5%. And those are ones I consider safe. If you want to take a risk on insurers, Legal & General is on 8% and Aviva on 9% – but the final Covid-19 impact on them is unknown.
With a selection from those UK shares, I reckon you should be able to secure an annual dividend income of at least 5% or 6%. But what about growth stocks?
There’s a lot of fallen share prices, and a good few of those surely have a decent recovery ahead of them. Synthomer is one of my favourite growth picks right now. It crashed badly in early in the year, but has recovered to stand just 12% down. Analysts are forecasting a return to double-digit earnings growth in 2021.
Go for biotech?
You’ll find a lot of folk tipping biotechnology stocks that could reap massive profits from the pandemic. But I’d urge caution there. There are more than 200 vaccine candidates currently under development. Only a minority of those at most will be successful and make it big. And going for companies offering novel treatments could be thwarted if successful vaccines render them unneeded. So there’s big risk.
I think a selection of mainly solid dividend payers, plus one or two growth candidates, should make a great portfolio of UK shares right now.
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Alan Oscroft owns shares of Aviva. The Motley Fool UK has recommended GlaxoSmithKline and Synthomer. 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.