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A stocks and shares ISA is a great way to build wealth for the future. It allows investors to place up to £20,000 a year in the stock market and earn all their returns free of income and capital gains tax, for life.
Stock markets can be volatile, but I think today is a good time to load up an ISA, because there are many big UK shares trading at rock-bottom valuations. Some of them are deservedly cheap, for example. BT Group, which trades at just 6.12 times earnings. The company has huge debts and an unwieldy pension plan, two problems that will prove difficult to solve.
I wouldn’t buy the telecommunications giant, but there are many FTSE 100 companies that trade with valuations similar to those I would include in my portfolio today.
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One of them is the energy group. Central. Its share price has soared 124% in the last year, but it still trades at just 4.5 times its earnings. As well as owning British Gas, he is also an oil and gas producer, and has benefited from the skyrocketing oil price.
I’m a little cautious about buying stocks after such a strong run. However, given the tragic events in Gaza, I think the oil price could remain high for some time, boosting Centrica’s share price.
Barclays The shares are also very cheap, trading at 4.94 times earnings. Like other UK banks, it has been hit by rising interest rates and fears of falling house prices. When the rate cycle turns, its stocks could finally take off. While I wait for that happy day, I will enjoy my 4.74% return.
mining giant Anglo-American It trades at just 5.5 times earnings and has an incredible yield of 7.27%. Its shares have been hit by rising interest rates and falling demand from China, as well as a substantial drop in diamond sales at its De Beers subsidiary.
I wouldn’t buy this stock anticipating an instant recovery. The world has too many problems. But when the global economy recovers, I would expect ultra-cheap commodity stocks like this to lead the charge. They usually do.
I’m thinking long term
Insurer Phoenix group holdings has been affected by stock market volatility, which has affected the value of assets it holds to fund insurance payments to customers.
It trades at just 5.7 times earnings and, incredibly, yields 10.96%. Double-digit dividends are rarely sustainable, but this one might be. Even if it is trimmed, it should still be quite generous.
My final FTSE 100 stock pick is also a bit risky, housebuilder Barratt Developments. House prices have fallen about 5% so far, and unless interest rates peak soon, they could fall much further.
I think much of the risk is reflected in its 6.2 times earnings valuation, while the reward comes in the form of its 8.03% yield. Again, this may not be sustainable if there is a prolonged downturn in the housing market. Time will tell.
To protect myself against the risk of buying stocks in today’s volatile market, my goal would be to hold them for a minimum of five years, and ideally much longer. Over the years they should add up nicely, hopefully tax-free within my stocks and Shares ISA.
