The question of whether or not to take advantage of the Stocks and Shares ISA allowance (and if so how) is one many investors grapple with each year.
Right now, we are many months away from the next annual contribution deadline (April 2027), so it feels like a suitable moment without time pressure to sit back and think about just what a Stocks and Shares ISA could potentially achieve.
A good year for the market
Take the past year as an example. During that period, the FTSE 100 index of leading British shares is up by 21%. So say someone had put their £20k Stocks and Shares ISA into index trackers 12 months ago. It now ought to be worth around £24,200.
That is before taking ISA charges into account, by the way (it pays to take care when selecting what Stocks and Shares ISA to use).
On top of that, the index offers a dividend yield of around 3.1%. At its cheaper price a year back, the yield would be higher. So £20k invested back then ought to be earning roughly £740 in dividends a year.
Can an ISA beat the market?
There can be more to investing that simply tracking an index though. Many investors prefer to buy individual shares. One important rule of investing is to reduce risk by diversifying across multiple shares. This is easily achievable with £20k to invest.
Such an approach could have done better than following the FTSE 100 over the past 12 months, meaning the ISA could now be worth north of £24,200 – and possibly earned more than £740 in dividends.
But it might also have fared worse than the index. After all, beating the market can be harder than it looks, though it is possible.
That said, 12 months is a relatively short timeframe for a long-term investor. There are a number of shares I own that have actually fallen in value over the past year but I still think have long-term potential.
Here’s a share I think looks undervalued right now
For example, one share in my portfolio is Greggs (LSE: GRG). I thought it looked cheap a year ago – yet the FTSE 250 baker is actually now 8% below where it stood back then.
Part of this can be explained by an unexpected profit warning last summer, unnerving the City. Greggs explained that hot weather had hurt sales, suggesting its demand planning was suboptimal. I see that as an ongoing risk.
But Greggs has been growing, both on a like-for-like basis and thanks to ongoing expansion of its shop estate.
The chain continues to see potential for a significantly higher number of outlets in the UK. That could give it further economies of scale, as well as helping to cement its strong position in consumers’ minds when thinking of somewhere to buy convenience food at an attractive price.
Too many shops could lead consumers to tire of the brand though. There are other risks too that may explain the share price fall, such as high energy costs eating into profits.
But from a long-term perspective, I think there is a mismatch between Greggs’ likely future value as a business and its current share price. I see it as a share for investors to consider now.
Should you invest £5,000 in Greggs Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Greggs Plc made the list?
Christopher Ruane owns shares in Greggs.
