Stop saving & start investing! How to build a £1m ISA with FTSE 100 dividend stocks

With all the volatility in the financial markets last year, growth and dividend stocks have lost a lot of ground with many investors. After all, it’s natural to run for the hills after a second stock market drop. And many are looking for protection in Cash ISAs and savings accounts.

It’s not hard to see why. Unless the bank goes under, deposits are virtually risk-free and provide a reliable stream of income with interest. What’s more, even if the worst happens and the bank fails, the first £85,000 of deposit money is protected by the FSCS.

As the Bank of England raises interest rates to fight inflation, the appeal of savings accounts strengthens. However, moving all capital into one might be a bad move. Even with higher risk-free returns, savings accounts have historically and continue to lag inflation. In other words, they can provide safety but also dent wealth in terms of spending power.

Therefore invest in the highest dividend stocks of FTSE 100 could be a smarter move.

Capitalize on high market yields

As with every stock market correction, panicky investors have a habit of selling anything on the pulse of fear. And this unscrupulous, emotionally driven behavior often results in perfectly good companies being put on the chopping block.

As frustrating as it is to watch, this creates a potentially lucrative opportunity for income investors. When the stock price goes down, the dividend yield goes up. And providing cash flow remains uncompromised, these higher payments are often sustainable.

The FTSE 100 dividend yield in 2021 is 3.2%. After 2022, this is now at 4.2%. And some of the dividend stocks in the UK’s flagship index offer even more.

according to The Times, in September 2022, the average interest rate offered by savings accounts in the UK is 0.85%. By direct comparison, FTSE 100 dividend stocks offer more than four times the amount of dividends alone.

Build a £1m ISA with dividend stocks

Instead of saving £750 a month, investors can put that money into a Stocks and Shares ISA. And using this capital, they can buy individual dividend stocks to maximize the yield offered by today’s high-quality companies.

Alternatively, investors can simply buy shares in a FTSE 100 index fund to top up their £1m ISA. Historically, the index has generated annual returns of around 7%, including dividends. And assuming these returns continue, investors will have a seven-figure investment portfolio within 32 years.

As exciting as the prospect of becoming a millionaire for minimal effort sounds, it is critical to remember that, unlike saving, investing has risks. 2022 is a good reminder that the stock market doesn’t always go up. And businesses that have thrived can fizzle out if economic conditions change.

A well-chosen portfolio of dividend stocks can result in less than expected returns for investors. This is especially true if the underlying business later announces a dividend cut, or outright cancellation, due to free cash flow.

However, these pitfalls can often be avoided by investing carefully. And given the potential rewards, the investment is worth the risk, in my mind.