The coming week will see the end of one tax year. A new one will begin next weekend. By then, it will be too late to contribute to an ISA using the current year’s allowance. Once that contribution period ends, it is gone forever, although a new tax year and new ISA allowance is around the corner.
Each investor has to make their own choices about how much to contribute to an ISA and what to invest it in.
To illustrate some such choices, however, here is what £10,000 invested in a Stocks and Shares ISA today could potentially achieve.
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Sizeable capital gains
Share prices can go up, move down or edge sideways over time.
For example, over the past five years, the FTSE 100 index has moved up by 57%. So a £10,00 investment in a FTSE 100 tracker fund five years ago would now be worth around £15,700.
I would welcome that sort of growth in my own portfolio. But the number is flattered by the fact that five years ago the FTSE 100 was still struggling as the stock market digested the implications of the pandemic.
Even if I wanted to target that sort of growth rate in coming years, though, my move would not be to track the index but rather to buy a carefully selected basket of individual shares.
Over the past five years, after all, some individual shares have done brilliantly. Nvidia is up 1,634%, for example. I think a savvy investor could spend time now trying to figure out what businesses look cheap relative to their long-term commercial prospects.
The sort of gain seen at Nvidia is exceptional. But it does happen – and some shares on sale today will end up soaring over the next few years. The job for an investor is trying to figure out which ones.
While capital gains are appealing for me, they can be cut down in size if an ISA’s dealing fees, account administration costs, and the like are high. So I think a smart investor will take time to compare different choices on the market when deciding what suits their personal needs best.
Passive income from proven blue-chip businesses
As well as the potential for capital gain, passive income is a reason many people like to use their ISA allowance buying dividend shares.
The average yield of the FTSE 100 is around 3.5%. On a £10,000 ISA that means around £350 per year.
But some FTSE 100 shares offer more. For example, I own shares in Lucky Strike manufacturer British American Tobacco (LSE: BATS).
Making and selling cigarettes is cheap to do but can be very profitable. That can generate sizeable cash flows that help support a juicy dividend.
British American has grown its dividend per share annually for decades and currently yields 7.6%.
A £10,000 ISA invested at a 7.6% yield would earn around £760 in dividends annually. An investor could compound them for 20 years. By then they would be earning around £3,290 of dividends annually.
Note that, while I own shares in British American, I do not only own those. Cigarette smoking rates are declining, and the company’s non-cigarette business strategy remains to be proven. Even a good business can run into difficult times.
So, I always keep my ISA diversified.
