Calculations made by the fund manager, Fidelity, show that you could become an ISA millionaire within just 25 years. That’s assuming you invest the maximum £15,000 per year (which is also assumed to increase with inflation) and that your ISA posts a total return (capital gain plus dividends) of 5% per annum.
So, here are five stocks that could help you to reach the epic milestone of becoming an ISA millionaire:
Shell
With a current yield of 4.4%, Shell (LSE: RDSB) does not need to deliver significant capital growth in order to meet the 5% total return target. Furthermore, Shell’s strong cash flow allows the company to increase dividends at an above-inflation rate of 3% next year and, perhaps more importantly, its dividend is comfortably covered by profit. Indeed, Shell seems to have the scope to pay a far higher dividend than at present, with the company only paying out half of net profit to shareholders. This means that even if earnings stagnate over the medium term, your dividend should still rise at a brisk pace and allow you to reach the required level of total return.
Lloyds
Although Lloyds (LSE: LLOY) has only just started paying dividends after its miserable performance during the credit crunch, the bank has big plans for shareholder payouts. Indeed, it is aiming to pay out up to 70% of net profit as a dividend by 2016, which means that its yield should rise significantly over the medium term. In fact, as soon as next year, Lloyds is forecast to yield 4.4% at current prices and, as with Shell, this means that only a modest capital gain is required each year to meet your 5% total return target.
SSE
Although SSE’s (LSE: SSE) share price could continue to be volatile in the short run – especially if Labour win the next election and introduce an electricity price freeze – it continues to offer attractive long-term potential. That’s because it trades on a modest price to earnings (P/E) ratio of 13 (versus 13.9 for the FTSE 100) and also comes with a yield of 5.6%. This beats the 5% required return for your ISA and, more importantly, SSE is aiming to match dividend per share growth to inflation. Therefore, it should retain its attraction as a strong yield play.
J Sainsbury
Although the supermarket sector is experiencing a highly challenging period, J Sainsbury (LSE: SBRY) could prove to be the biggest winner in the long run. It will take on discount retailers via a joint venture with Netto and look to go more upmarket with the J Sainsbury brand, thereby potentially avoiding the squeezed middle that includes sector peers Tesco and Wm. Morrison. As well as having long term potential, J Sainsbury currently trades on a P/E of just 10.6 and yields 5.3% — more than your required return.
ARM
The above four stocks provide an average yield of 4.9%, however ARM (LSE: ARM) brings the average for the five down to 4.1%. That’s because it yields just 0.8%, but what it lacks in income it should make up for in capital growth over the long run. Indeed, ARM is at the forefront of the intellectual property race within the technology sector and, unlike many of its peers, focuses on design and ideas rather than manufacturing. This allows it to stay one step ahead of many of its peers and is a key reason why profits are forecast to increase by 14% this year and by 22% next year, thereby providing growth potential to your ISA over the long run.
