If I was building a Stocks & Shares ISA portfolio from scratch, I would start my search on the FTSE 100. The UK’s blue-chip index contains a broad range of stocks that offer the capital growth and dividend income I’d need to build my wealth over time.
The FTSE 100 fell out of fashion during the bull market, when investors favoured whizzy US tech stocks, but is showing its mettle in this difficult year. It has been boosted by the relative success of the energy and mining sectors. The banking, insurance, utility, and healthcare sectors have also shown their value in a crisis.
My Stocks and Shares ISA dream team
I would build my dream portfolio on a bedrock of solid income stocks. As inflation rises, a regular stream of dividends would help protect the value of my fledgling portfolio in real terms. Investing in stocks lower down the risk scale might also save me from an early, dispiriting setback.
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First, I would buy something really solid, like utility National Grid. This stock isn’t entirely without risk (none is). Its earnings are regulated and could get squeezed as anger over energy privatisation continues. Yet it has offered a solid income for years, and yields 4.75% today.
I would then add a stock from another solid dividend sector, in this case, financial services. Insurer Legal & General Group has the double attraction of a low valuation (7.67 times earnings) and high income (6.95%). It also recently posted an 8% increase in operating profits to £1.1bn, boosted by higher interest rates and its growing portfolio of annuities.
The L&G share price has looked cheap for years so I am not expecting a sudden re-rating. Yet the low valuation may offer some downside protection. I will complement it by investing in spirits giant Diageo. This company confirmed its reputation as a solid defensive stock, recently posting a 21% increase in full-year sales to £15.5bn.
The Diageo share price isn’t cheap, trading at 25 times earnings, but then it never is. The dividend looks low at 1.99%, but that’s usually the case, too. The company’s dividend policy is progressive and the stock has offered strong returns through thick and thin.
I like high yields at low prices
It’s hard to resist the energy sector this year and my start-from-scratch portfolio would include oil giant BP. The yield is lower than it used to be at 3.5% but the valuation looks promising at 13.94 times earnings.
BP has a tough job ahead making the transition to renewables. Yet as we have seen lately, the oil age is not dead yet. I would complete the groundwork for my dream portfolio by investing in the banking sector, picking out Lloyds Banking Group.
It looks dirt cheap trading at just 6.13 times earnings. The 4.27% yield is forecast to climb steadily to 5.5% next year. Like L&G, shares in Lloyds seem to be perennially undervalued. I hope to be holding it when the market finally wakes up to its worth.
