Having £400 to invest in UK shares might not sound like a lot, but it is to me.
With the domestic economy labouring in the face of stubborn inflation and rising interest rates, the UK stock market (a bit like my personal finances) has suffered of late.
But this means cash will stretch further than it did a few months ago. And if I picked the right stocks, this sum of money could grow significantly over the longer term.
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I take inspiration from the knowledge that £400 invested in Berkshire Hathaway in 1965 — Warren Buffett‘s investment firm — would have been worth over £14m at the end of last year!
However, a compounded annual growth rate of 19.8% is exceptional.
For example, the FTSE 100 has returned an average of 3.6% annually over the past five years. Although to be fair, given that we’ve had Brexit, a pandemic, and a war in Europe during this period, this is not a bad result.
What I’d do
With a relatively small sum to invest, I’d choose two stocks. One with good growth prospects and another that has a track record of paying regular and increasing dividends.
I would use the income received to buy more of the growth stock, to further boost the value of my portfolio.
Growth
Scottish Mortgage Trust (LSE:SMT) invests in high growth companies, mainly in the tech sector.
Its shares currently trade at a 22% discount to its net asset value. This differential hasn’t been as big for some time. In fact, as recently as 2018, it traded at a premium.
Although the fund has performed poorly lately, its manager is confident that the impressive returns achieved from 2018 to 2021 will be repeated. Baillie Gifford believes the fund will outperform those that it sees following the current trend of looking for so-called safe and reliable investments.
But the bursting of the ‘dot com’ bubble in 2000 is a reminder that these types of shares can quickly fall out of favour.
And some of the fund’s investments are in unlisted companies — Elon Musk’s SpaceX is the best known example — which can be difficult to value and carry greater risk.
Income
National Grid (LSE:NG.) shares will never feature in the SMT portfolio.
It owns and operates the electricity grid in the UK, and supplies gas in parts of the US. It therefore doesn’t qualify as a growth stock. Because it enjoys monopoly status in the markets in which it operates, it’s tightly regulated. Its scope for increased revenues and earnings is therefore limited.
But reasonably predictable profits enables it to offer generous returns to shareholders.
For its 2019 financial year, it declared a dividend of 47.34p a share. In 2023, it was 17% higher at 55.44p.
Assuming it’s repeated this year — although I expect it to be higher — this gives a current yield of 5.5%. This is comfortably above the FTSE 100 average.
Of course, dividends are never guaranteed.
And any company operating in a regulated industry is vulnerable to changes in government legislation.
Success
Although I’m not in a position to invest right now, I’d like to have SMT and National Grid in my portfolio.
I believe having a good mix of growth and income shares is the key to long-term success.
