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A Stocks and Shares ISA can be an effective way to grow a portfolio. As the realised profits from selling a stock or receiving a dividend are exempt from tax, this can speed up the process. So if an investor focused on income shares and reinvested the proceeds, here’s how quickly an ISA could double in value.
Focusing on the yield
The beauty of this strategy is that it isn’t really dependent on how much an investor can afford to buy. An ISA with £1k in it needs to follow the same idea as one containing £100k. The main principle to focus on is the rate of return. When using income shares, this is typically measured via the dividend yield.
At the moment, the FTSE 100 dividend yield is 3.06%. Yet within the index, there are plenty of other options with higher yields. As a result, I think it’s reasonable to target an annual yield of 7% in the ISA. When dividends are received, the money would be used to buy more of the stock, effectively compounding the rate of growth even faster, rather than just spending the funds.
If an investor simply adds a notional amount in the ISA and didn’t top it up, it could double in value by year 10. Of course, this isn’t guaranteed. Over the course of a decade, a lot could change in financial markets. This means that companies might cut dividend payments or face a host of other risks.
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.
A FTSE 100 gem
One example of an income stock that fits the target remit is M&G (LSE:MNG). The company has a current dividend yield of 7.26%, with the stock up an impressive 43% in the last year.
One major factor in the gains has been due to strong client inflows. In the most recent quarterly update, the company revealed £1.8bn in net inflows for the period. This meant that year-to-date, it had attracted £3.9bn worth of inflows. This is key because M&G charges for managing the money. As a result, there’s a strong correlation between higher earnings and higher assets under management.
This brings us to the dividend. We’ve seen five straight years of increased dividend per share payments, and I think this will continue. Looking ahead, there’s a growing structural demand for retirement and income products. This is partly based on an ageing population, as well as continued support for general investment.
Of course, no business is perfect. I think one risk is the exposure to lower interest rates in the UK. If we get sudden cuts in 2026, it would act to lower profitability in annuities and savings products.
Despite this concern, I think it’s a good income stock and one that could be considered for investors pursuing an ISA growth strategy.
The post How long could it take to double the value of an ISA using dividend shares? appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g 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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