While rising share prices may have boosted the values of many Stocks and Shares ISAs in recent months, it’s still possible to buy dirt-cheap UK shares. After all, the stock market continues to trade significantly below its record high.
Through buying undervalued shares today, an investor may be able to capitalise on a likely stock market rally. Judging by the stock market’s past performance, it’s set to reach new record highs in the coming years. And that could have a positive impact on the prospects for many ISAs.
High dividend yields for a Stocks and Shares ISA
Stocks and Shares ISAs could gain a boost from holding UK shares with high dividend yields. There’s a dearth of passive income opportunities available outside of equity markets. So companies such as GSK and Aviva could become increasingly popular among investors. Their 5% and 7% dividend yields are significantly higher than the FTSE 100’s yield. This suggests they offer good value for money.
Looking ahead, both stocks could raise shareholder payouts at an above-inflation pace. GSK is set to split into two businesses as it seeks to bolster its efficiency over the coming years. Aviva is making asset disposals to streamline its operations and improve its financial position after what has been a mixed period for the business. These changes may mean a higher chance of rising dividends. In turn, that may make a positive impact on Stocks and Shares ISA valuations in the long run.
An improving economic outlook
Other dirt-cheap UK shares could be among the biggest beneficiaries of a stock market rally in the coming years. For example, the valuations of Imperial Brands and British Land suggest they could have significant capital growth potential that has a positive impact on the value of a Stocks and Shares ISA.
Imperial Brands currently has a dividend yield of 9%. This suggests it offers good value for money. Meanwhile, its strategy to generate higher returns from next-generation products could lead to rising profitability.
British Land trades at a 30% discount to its net asset value. This could mean it has significant scope to deliver share price growth as the prospects for the commercial property sector, and its valuations, improve. It’s also adapting its exposure to more attractive parts of the property market.
Meanwhile, UK shares such as BT could also offer long-term growth potential within a Stocks and Shares ISA. The company recently reported an improving operational performance. As it rolls out its 5G network and focuses on becoming more efficient, it has the potential to report rising levels of profitability. Since the stock trades on a price-to-earnings (P/E) ratio of just 7, it seems to offer a wide margin of safety. And that could lead to capital growth in a long-term stock market rally.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co, GlaxoSmithKline, and Imperial Brands. 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.