UK shares are sometimes overlooked in favour of the more famous names on the other side of the Atlantic. But recent history shows there are plenty of amazing domestic stocks to choose from. Indeed, there are currently (20 June) 42 on the FTSE 100 that have outperformed, for example, Microsoft over the past five years.
With this in mind, here’s how a successful UK-focused, stock-picking strategy could produce a very healthy ISA.
What do the numbers show?
Most people don’t have a large lump sum to invest. Instead, they are probably going to have to set aside some of their disposable income each month. And in my opinion, I reckon a Stocks and Shares ISA is a great place to start. That’s because all income and capital gains can be earned tax-free.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Obviously, circumstances will vary. And the amount of spare cash that people have is likely to fluctuate during different stages of their lives. But let’s assume an individual is in a position to put £250 a month into an ISA. How would this grow over a lifetime (30 years) of investing?
Unsurprisingly, the answer depends on the annual rate of return achieved. Here are a few examples:
- 6% – £237,175
- 7% – £283,382
- 8% – £339,849
- 9% – £408,923
- 10% – £493,482
Let’s look at the mid-point of these. Could a rate of 8% be achieved? I think so.
Impressive returns
Earlier, I mentioned Microsoft. Over the past five years, the average annual increase in its share price has been 7.9%. The 42 members of the FTSE 100 that have done better have averaged 22%. If this higher rate could be achieved for 30 years, an investment of £250 a month would grow to £5.3m!
However, this average annual return includes some exceptional performances – Rolls-Royce Holdings (66%), to name just one – that are unlikely to be repeated indefinitely.
Personally, I think this analysis shows the potential of UK shares. But to err on the side of caution, I reckon an annual return of 8% is realistic when considering the potential long-term gains that might be realised from investing in the stock market.
Right place, right time
Indeed, one stock that’s delivered a near-8% annual return since June 2021, is SSE (LSE:SSE). The group, which claims to be “at the heart of the clean energy transition”, currently operates 5GW of renewable energy projects with another 2.5GW under construction. It has a further 18GW in its development pipeline.
Unfortunately, energy infrastructure’s expensive, which means the group’s debt is on the high side. And it operates in regulated markets. Therefore, a change in government policy could pose a threat to earnings.
However, even though the timetable for net zero may be slipping, it’s clearly the direction in which the UK’s going. And no matter how bad the economy may perform, people are always going to need energy. Looking ahead, data centres are likely to consume huge amounts of electricity.
Against this backdrop, the group hopes to increase its earnings per share between now and 2031 by 10%-13% a year.
On balance, I think it’s the sort of stock that could be considered by a long-term investor. It’s likely to be a steady and reliable performer, which means it could be tucked away in an ISA and forgotten about.
Should you invest £5,000 in SSE right now?
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James Beard owns shares in Rolls-Royce Holdings plc.
