My simple plan for a £1m ISA: start investing in FTSE 100 dividend growth stocks today

FTSE 100 (INDEXFTSE:UKX) dividend growth stocks could deliver high returns, in Peter Stephens’ opinion.

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While FTSE 100 dividend stocks could offer an impressive income return, dividend growth stocks could produce significant capital returns in the long run. A rising dividend may suggest a company has an improving financial outlook, and that its management team is upbeat about the future prospects for the business.

Furthermore, dividend growth could lead to higher demand from investors who are seeking an improving income return, which may catalyse the stock’s market valuation. As such, investors who are seeking to become ISA millionaires may wish to focus on dividend growth stocks at the present time.

Improving prospects

While a high yield may provide a generous income in the near term, dividend growth stocks could produce higher total returns in the long run. Certainly, in some cases, they may offer a lower initial yields than other income stocks. But for long-term investors the difference can be made up by rapidly-rising dividends over a multi-year time period.

Furthermore, a company that is set to raise dividends at a rate that’s significantly above inflation may be set to experience a period of improved financial performance. This could increase investor sentiment towards the stock, while also suggesting the company’s management is positive about the future prospects of the business. They may see a growth opportunity that’s not obvious to investors, or have plans to make changes to the business in order to maximise its financial performance.

A business that can afford to pay a fast-growing dividend may also have a strong financial position. This can mean the risk of an investor losing money is lower relative to stocks that may have less scope to reward shareholders through higher dividend payouts.

Investment performance

A rapidly-rising dividend is likely to be of great interest to income-seeking investors over the long run. They may focus on a company’s track record of dividend payments and determine there’s an opportunity to generate an impressive income return over their time horizon. This can produce higher demand for a company’s shares, and may lead to a rising share price over the long run.

Therefore, while investing in stocks that are focused on reinvesting their excess capital in order to capitalise on growth opportunities may seem logical, buying companies that have scope to raise dividends could be a better idea.

Not only does it have the potential to provide an investor with the scope to generate a high income in the long run, it could signal reduced risk, as well as offer capital growth potential as demand for the stock in question rises among a wide pool of investors.

With a number of FTSE 100 stocks currently set to deliver high dividend growth in 2019 and beyond, now could be a good time to add dividend growth stocks to a portfolio in order to increase the chances of becoming an ISA millionaire.

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.

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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