There are several thousand Stocks and Shares ISA millionaires in the UK, and a lot of them have a good amount invested in passive income stocks.
Yes, that’s right. These millionaires didn’t get there by stumbling upon the latest ‘get-rich-quick’ tech startups. No, they bought companies that generate strong cash flow and pay progressive dividends.
Then they reinvested those dividends each year in more shares, and patiently waited for the miracle of compounding to weave its magic.
Investment trusts
Checking data from providers AJ Bell, Hargreaves Lansdown and Interactive Investor, I see ISA millionaires are more heavily into investment trusts than average.
City of London Investment Trust’s (LSE: CTY) a popular one and I hold it. It’s currently on a forecast dividend yield of 4.9%.
That’s not the UK stock market’s biggest. But it’s risen every year for 58 straight years. City of London tops the Association of Investment Companies’ list of ‘Dividend Heroes’, which have achieved the feat for 20 years or more.
It’s not without risk, and the focus on dividends can mean spells of poor share price performance. City of London shares have failed to match the FTSE 100 over the past five years, up just 3.3%. The index managed 13%.
Long-term growth
An end to the 58-year run could cause pain. But the trust has doubled in price over 20 years, well above the Footsie. And with dividends ahead of average too.
That’s the key secret for me. Put my cash into dividend-paying stocks that I think are likely to do better overall than average. Then reinvest the dividends and wait.
Billionaire investor Warren Buffett’s been doing it like this at his Berkshire Hathaway investment company for decades. We can get ahead by learning from the experience of others.
Dividend-based trusts aren’t the only ones the top ISA holders own. Scottish Mortgage Investment Trust’s also popular, and that goes for US Nasdaq growth stocks.
Spread the risk
Scottish Mortgage is on an 11% discount to its underlying net asset value. And I can see the attraction of that. But some observers fear a Nasdaq correction, which moves me onto diversification.
Millionaire ISA holders diversify, and on average don’t have much in higher-risk growth trusts like this. I’m the same. So what do they hold for diversification?
It includes many of the same steady stocks that most passive income investors already know well.
BP and Shell are on the list (with their forecast dividend yields of 6.1% and 4.2% respectively). Lloyds Banking Group (5.3%) is there too, as are Aviva (7.1%), National Grid (5.7%), Legal & General (9.4%) and Diageo (3.4%).
A millionaire’s passive income
Looking at those individual favourite stocks, I see something interesting. They have an average dividend yield of 5.9%.
An investor who can reach £1m by reinvesting their passive income could then earn £59,000 a year in passive income from that rate of return, or £4,900 a month. And still hold all their shares.
There’s no guarantee of price rises, and none for dividends either. But I rate this as the investing approach with the best odds for me.
This post was originally published on Motley Fool
