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I think a Stocks and Shares ISA is a great vehicle for investments. If you were investing £20,000 today, you would be looking for stocks that have a chance of being worth significantly more in the future than they are now.
The way I see it, there are four things that increase the value of a company’s stock. I would look for investments that could benefit from each of these.
revenue growth
The first way for a company’s stock to be worth more is for the company’s revenue to increase. Other things being equal, that means the company generates more cash for its shareholders.
A good example of this is Halma. Over the past 10 years, the company has grown its revenue by an average of about 9% per year.
As a result, Halma’s share price has risen 371% since 2013. Since I believe this company can continue to grow its revenue, I would love to buy it in the future.
margin expansion
Even if a business doesn’t increase its revenue, it could still generate more cash. That comes as a result of the company’s expanding margins.
mcdonalds is a great example of this. Over the past decade, the company’s revenues have largely stagnated, but it has improved its operating margins from 30% to 43%.
Consequently, McDonald’s shares have gone from $96 in 2013 to $273 right now. If this can continue, I think the share price can go even higher, which is why I would buy it in a Stocks and Shares ISA today.
share repurchase
Stock prices can also push a company’s shares higher. When a company repurchases its own shares, the number of shares outstanding decreases and future earnings attributable to each share increase.
One of Warren Buffett’s favorite stocks: Bank of America — illustrates this quite well. The company’s share price has gone from $11 to $36 in the past 10 years, despite modest revenue and margin growth.
This is because the number of Bank of America shares outstanding has decreased by 25% over the last decade. As a result, the earnings attribute of each stock has increased, pushing the share price higher.
dividend increases
Finally, a company’s stock price can rise because it increases the dividends it pays out to its shareholders. Diploma is an action I have that illustrates this quite well.
The company has increased its dividend per share by an average of 11% per year over the past 10 years. I think that’s quite significant. As a result, the company’s share price has risen from £5.65 to around £27.
The size of Diploma means that I think it can continue to support its dividend growth. This is why I own the stocks in my portfolio and why I would buy them if I were investing in a Stocks and Shares ISA today.
Diversification
If I were deploying £20,000 into my Stocks and Shares ISA, I would buy these four companies. Concentrating my portfolio seems risky, but I think these investments offer reasonable diversification.
These four stocks offer a balance of different industries, sizes, and geographies. Even with just a few large investments, I can still limit my risk by diversifying.
