So, a Stocks and Shares ISA is only for people who have lots of money to invest, is it?
No, that’s simply not true. In fact, I believe it could be the best way for ordinary folk like us to boost our long-term financial health.
We hear about AI tech stocks now, how they’re worth trillions of dollars… and how they could crash at any time. Scary stuff.
But here in the UK, I think we have a unique opportunity to greatly reduce the risk and set up a nice second income stream for the years ahead.
Wealth from dividends
It’s down to two key things.
First, we have a lot of FTSE 100 shares that are making steady profits and paying big dividends. And even though the stock market has been picking up in 2024, I still see a lot of bargain buys.
Then there are the benefits a Stocks and Shares ISA brings. An ISA protects our gains against tax, and lets us invest with small regular amounts. With the provider I use, I can pay in as little as £25 each month.
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.
What’s it worth?
How much might our modest £200 each month add up to? Let’s look at an example.
I rate National Grid (LSE: NG.) as one of the FTSE 100’s truly great long-term income investments. But let’s take a quick look at the share price.
From that chart, we see the shares took a dive at the end of May. The company surpised the market with a new £7bn share issue, to raise capital for the development of its energy delivery networks.
I think the market overreacted, but it shows one of the risks of shares. Even the most boring company can create the wrong kind of excitement at times. It means we really should go for a diverse selection of stocks.
The magic of compouding
Still, the drop has pushed the forecast dividend yield up to 6%. It’s not the FTSE 100’s biggest, with a handful up over 9%. But I reckon it could be one of the more reliable.
Let’s guess at an additional 2% per year share price rise, in line with the UK’s inflation target.
To compound that kind of return, we should plough our dividend cash back into buying more shares.
And an investor who starts doing that today, and keeps it up for the next 20 years, could end up with more than £110,000 stashed away. From just £200 per month.
Risk vs reward
Now, that’s just one example, and things can go wrong. If National Grid should decide to raise more cash in the future, that could hit investor confidence again.
And with every company, we should keep an eye on far more than the dividends. Debt and cash flow are two of my most important criteria.
But the UK stock market has made average annual returns of around 7% for many decades. I reckon a diversifed ISA portfolio focusing on dividend stocks has a good chance of beating that.
This post was originally published on Motley Fool
