How a strong portfolio of assets in a Stocks and Shares ISA can beat a top tracker fund

According to market data, the average return on a Stocks and Shares ISA over the past 10 years has been around 9.6%. That’s considerably higher than a standard savings account or Cash ISA.

Even one of the top-performing FTSE 100 tracker funds, the iShares Core FTSE 100, has managed annualised returns of only 8% over the same period.

This suggests that the average investor can beat the market when building a self-directed portfolio. The tax advantages are the cherry on top. An ISA shields dividends and capital gains from tax, with a generous £20,000 annual contribution allowance. Over decades, that makes a remarkable difference to compounding wealth.

Of course, there are fees to keep in mind. Platform charges, fund fees, and dealing costs can all chip away at returns if not managed carefully. Still, for those who pick wisely, the structure of an ISA makes long-term growth highly attractive.

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.

So what does a typical Stocks and Shares ISA look like? 

For most, the bulk is invested in shares, complemented by government bonds and a mix of funds. More adventurous investors sometimes add property funds, commodities, or infrastructure trusts for diversification.

Among individual holdings, the same names appear year after year. Lloyds, Shell, GSK, BP, Aviva, HSBC, National Grid, and Legal & General have long been some of the most popular FTSE 100 shares tucked inside ISAs. Each has scale, history, and, in many cases, solid dividend yields.

New kid on the ISA block

Interestingly, one stock that has recently climbed into the ISA spotlight is Taylor Wimpey (LSE: TW.). Over the past month, the UK’s third-largest housebuilder has begun showing up in several top 10 lists of ISA picks.

The most obvious reason is its dividend yield. At 10%, it currently boasts the highest yield on the FTSE 100. That sort of payout is hard to ignore for income hunters. The attraction is also amplified by a share price that has fallen roughly 40% over the last year. It now sits close to its lowest point in more than two years — a sharp contrast to the broader UK market, which has been moving higher.

So, is Taylor Wimpey a hidden income gem waiting to be discovered? 

I’m not convinced. A forward price-to-earnings (P/E) ratio of 11.7 does not scream bargain territory, and its valuation metrics are only marginally below sector averages. Earnings have dropped a hefty 65.8% in the past year, which means the dividend is at risk of a cut if things don’t improve.

The good news is that Taylor Wimpey carries very little debt, so heavy interest costs don’t weigh it down. But until profits stabilise, I think this yield looks a bit too speculative.

Is it worth considering?

Plenty of ISA investors clearly think it’s worth consideration, and I can see why. If the UK housing market improves, Taylor Wimpey could reward patient holders. But that largely hinges on inflation declining and interest rates easing.

Personally, I plan to hold my existing shares in expectation of a recovery – but I’m cautious. 

For those building a Stocks and Shares ISA today, Taylor Wimpey could be one to consider as part of a diversified portfolio, balanced with some of the more stable blue-chip names mentioned above. In this way, an investor can aim to outperform the market without taking on unnecessary risk.

The post How a strong portfolio of assets in a Stocks and Shares ISA can beat a top tracker fund appeared first on The Motley Fool UK.

More reading

• Is this 9.7%-yielding second income opportunity too good to be true?
• Here are the pros and cons of buying Taylor Wimpey shares today!
• Here’s the forecast for 2 of the FTSE 100’s biggest dividend shares
• Taylor Wimpey shares now offer a 10% dividend yield. Should investors consider buying them?
• How to claim your share of £80bn in passive income from FTSE 100 shares

HSBC Holdings is an advertising partner of Motley Fool Money. Mark Hartley has positions in Aviva Plc, Bp P.l.c., GSK, HSBC Holdings, Legal & General Group Plc, Lloyds Banking Group Plc, National Grid Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended GSK, HSBC Holdings, Lloyds Banking Group Plc, and National Grid Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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