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I can't wait to start topping up this year's ISA and now seems like a great time to do so as I can see cheap stocks everywhere.
Last week they got a little cheaper, with the FTSE 100 Index On Friday, they fell 1.18% and closed at 8,155.72. That only makes me want to buy more.
I won't be able to reach the £20,000 maximum I'm entitled to in my stocks and shares ISA this year. However, I'll be investing as much as I can. Over time, I think it's possible I could start from scratch and save a large sum, like £275,000. That would make my retirement look a lot brighter.
FTSE 100 Index buying spree
I'm not putting a penny into a cash ISA. I have an easily accessible savings account for short-term emergencies, but shares are the best way I know to build long-term wealth. While it's possible to get 5% in cash today, that percentage will drop once the Bank of England cuts interest rates.
By contrast, these two FTSE 100 stocks pay income of around 7% and can hopefully continue to do so regardless of what happens to base rates.
FTSE 100 Index mining giant Rio Tinto (LSE:RIO) looks really cheap today, trading at just 8.8 times earnings, well below the FTSE 100 average of 12.7 times.
It has a cumulative return of 6.9% per year, decently covered by earnings at 1.7 times. It is also projected to return 6.9% next year.
Dividends are never guaranteed. As this table shows, Rio Tinto's board has recently cut its payout to shareholders.
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Like all mining stocks, Rio Tinto has been hit by the slowdown in China. Revenue hit $63.5 billion in 2021, but fell to $55.6 billion in 2022 and $54 billion in 2023.
Sales are projected to continue to slow to $53.1 billion in 2024 and $53.7 billion in 2025. So there's a reason it's cheap.
<h2 class="wp-block-heading" id="h-great-value-stocks“>High value stocks
Rio Tinto's share price plunged 6.54% last week and is down 3.53% in a year. However, taking a long-term view, the current low valuation offers a brilliant entry price. I'll buy it as soon as I have the cash and then wait for it to recover.
Now, let's say I have £10,000 to invest in my ISA this tax year and I put £5,000 into Rio Tinto and £5,000 into a FTSE 100 insurer. Avivawhose yield is expected to be 7.2%.
All in all, that would give me an average forward return of 7.05%. With a £10,000 stake, I would get an income of £705 in the first year.
If these shares offered an average total return of 7% per year, it would take me 49 years to reach my target of £250,000. That's too long.
However, if I put £10,000 more into an ISA each year, I'll get to that level in just over 14 years. And if my stock picks perform well and give me a total annual return of 9%, I'll get to that level in less than eight years. Of course, there's a risk that it won't happen and that I could lose money too. But that's my strategy and I'll stick to it over the summer, filling my ISA with cheap UK shares.
