I see a Stocks and Shares ISA as a long-term investment vehicle. That is why I sometimes think about my ISA with a very expansive mindset.
For example, I think it is possible to aim and double the money in my ISA, if I am willing to be patient. Here is how I would go about it.
Dividends and compounding
My approach would be to invest in shares with big dividend payouts. Dividends are never guaranteed and shares that have high yields often have notable risks. That can be why the yields are unusually high. So I would be sure to diversify my portfolio across a number of different dividend shares in various industries.
Then, instead of withdrawing the dividends when they are paid, I would reinvest them in the same shares. This is what is known as compounding.
For a year or two, the growth in my ISA may not seem remarkable. But the more years I reinvest dividends, the bigger my ISA should get – generating even larger dividends in future. This is a kind of snowball effect — as the snowball goes downhill, it picks up more snow that, in turn, also starts to do the same. I can hopefully see my funds grow as they benefit from compounding.
Aiming to double my money
But although they grow, why would my funds double? It may be easiest to illustrate with an example. If I invest my Stocks and Shares ISA in shares with an average yield of 8%, after nine years I should have £1,999. The following year, my ISA should be worth £2,159. That is more than double what I invested in it, just due to compounding dividends.
This example assumes share prices and dividends will remain the same. That might not happen in practice. Higher share prices or dividend cuts could mean it takes me longer to see my funds double. Then again, if share prices fall or dividends increase, I might actually double my money faster.
Dividend shares for a Stocks and Shares ISA
So much for the theory – what about the practice? After all, are 8%-yielding dividend shares easy to find? Actually, quite a few shares offer an 8% dividend yield at the moment without even needing to look outside the FTSE 100. These include tobacco maker Imperial Brands, housebuilder Persimmon, miner Rio Tinto, fund manager M&G and insurer Phoenix.
If I split my Stocks and Shares ISA evenly between those five names, my prospective yield overall would be over 8%. That could change over time – falling metal prices could hurt Rio Tinto or a housing market downturn might lead Persimmon to cut its dividend, for example.
No dividend is ever guaranteed. But actually even those 8%+ dividends could grow. Persimmon was the only one of those five shares not to grow its dividend last year.
