I think that a Stocks and Shares ISA is a great vehicle for investments. If I were investing £20,000 today, I’d look for stocks that have scope to be worth significantly more in future than they are now.
As I see it, there are four things that increase the value of a company’s stock. I’d 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 that the business generates more cash for its shareholders.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
A good example of this is Halma. Over the last 10 years, the company has increased its revenues by an average of around 9% per year.
As a result, the Halma share price has increased by 371% since 2013. Since I think this company can continue to grow its revenues, it’s one I’d be happy to buy for the future.
Margin expansion
Even if a business doesn’t increase its revenues, it might still generate more cash. That comes as a result of the company’s margins expanding.
McDonalds is a great example of this. Over the last decade, the company’s revenues have been largely stagnant, but it has improved its operating margins from 30% to 43%.
Consequently, McDonalds shares have gone from $96 in 2013 to $273 right now. If this can continue, I think the share price can go higher still, which is why I’d buy it in a Stocks and Shares ISA today.
Share buybacks
Share prices can also push a company’s stock higher. When a company buys back its own shares, the number of shares outstanding decreases and the future earnings attributable to each share goes up.
One of Warren Buffett’s favourite stocks — Bank of America — illustrates this quite well. The company’s share price has gone from $11 to $36 over the last 10 years, despite modest revenue and margin growth.
This is due to the number of Bank of America shares outstanding declining by 25% over the last decade. As a result, the earnings attribute to each share has increased, pushing the share price higher.
Dividend increases
Lastly a company’s share price can go up because it increases the dividends it pays its shareholders. Diploma is a stock I own that illustrates this quite well.
The company has increased its dividend per share by an average of 11% per year over the last 10 years. I think that’s quite significant. As a result, the company’s share price has gone from £5.65 to around £27.
Diploma’s size means I think it can continue to support its dividend growth. That’s why I own the stock in my portfolio and why I’d buy it if I was investing in a Stocks and Shares ISA today.
Diversification
If I were deploying £20,000 in my Stocks and Shares ISA, I’d buy these four companies. Concentrating my portfolio seem risky, but I think that these investments offer reasonable diversification.
These four stocks offer a balance of different industries, sizes, and geographies. Even with only a few great investments, I can still limit my risk by diversifying.
