£1k to invest? I’d buy FTSE 100 dividend stocks in a Stocks and Shares ISA now

Investing free of tax in the FTSE 100 (INDEXFTSE:UKX) through a Stocks and Shares ISA should make for a happier retirement.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing £1k, or any other amount, in today’s stock markets may seem risky as coronavirus fears grow, but there is always something for investors to worry about. The US-China trade war, Middle East tensions, Brexit and slowing global growth have all made investors cautious in recent months.

A good time to invest

Ironically, investing in the FTSE 100 when others are wary can be a good move. While markets may slip in the short run, they tend to recover quickly once the immediate danger has passed, and climb to fresh highs. So this could make now a good time to invest your £1k (or £2k, £5k, whatever) in the index.

The key to reducing risk is to leave the money invested for at least five years, and preferably much longer, to give time for stock markets to recover. Over the decades, the FTSE 100 has delivered an average annual return of 9% a year, including share price growth and reinvested dividend income.

Many people underestimate the importance of dividends, but if you reinvest them for growth, they will generate a substantial part of your total return. The FTSE 100 offers one of the most generous yields of any global index at 4.24% a year, far more than you will get on cash. Any capital growth from rising share prices will come on top of that.

Spread the risk around

Recent falls may make this a good time to buy an exchange traded fund (ETF) tracking the FTSE 100, or a range of income shares. Whichever you choose, be sure to invest inside a Stocks and Shares ISA, then you can take all your returns free of tax, for life.

Because of any number of global issues, you could experience a period of volatility, so the value of your money falls in the short run. However, it is important to remember that you are investing for the longer run, primarily for retirement, which could be 10, 20 or 30 years away. Over such a lengthy period, a short-term dip has little impact.

In fact, dips are good opportunities to buy, as you will pick up more stock at a reduced price.

Today’s low interest rates make FTSE 100 dividend stocks look particularly attractive, as you will struggle to get more than 1% on cash. This is driving demand for blue-chip stocks, which typically offer the most generous yields. You can access this simply and cheaply, by investing in a FTSE 100 ETF. I think the offerings from iShares and Vanguard are good value.

Get yourself a blue-chip income

Otherwise, do your research and build a spread of income-paying stocks. You can get yields as high as 8% a year from stocks such as housebuilders Persimmon and Taylor Wimpey, and tobacco giant Imperial Brands.

Investing your £1k in an ETF tracker or stocks like these can help you build your long-term wealth. If you top up your ISA when you have more money to invest, your long-term wealth should grow over time, even with a few bumps along the way.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »