How I’m investing £500 a month in my Stocks and Shares ISA to retire early!

My Stocks and Shares ISA is a very effective investment vehicle because it shelters me from capital gains tax. Although I’m allowed to invest a maximum of £20,000 per year, I’ve come up with a strategy to retire early by using £500 per month to add stocks to my portfolio. Let’s take a closer look.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Only £500?

Putting away £500 every month may seem a futile exercise. After all, how is that going to allow me to retire early?

Well, that monthly amount turns into £6,000 every year. In turn, this becomes £60,000 over the course of a decade and that’s just the cash figure. It doesn’t even take into account any long-term investment growth.

Monthly investing also means that I’ll be better able to average the price at which I buy shares, during dips and peaks.

The point is that by investing my money in stocks, I’m putting it to work. There’s a good chance it would just sit gathering dust in a savings account and I would have the added problem that savings interest lags inflation, thus I could lose purchasing power. 

Targeting high dividend yields

I generally operate my Stocks and Shares ISA using two strategies. The first is to target income by investing in companies with the biggest dividend yields. 

For this, I scour the FTSE 100 index because this is usually where the most consistent performing firms are listed.

At the current time, both Rio Tinto and Persimmon have dividend yields in excess of 13%. While dividend policies may be subject to change, these are extremely attractive. Aside from those two businesses, there are many others that offer appealing yields.

By holding the shares in any of these companies over the long term, I may be able to gain income by the mere fact that I own the stock.

It’s also worth noting that the average annualised return on the FTSE 100 between 1984 and 2019 was 8.33%. The average total return was 657.81%, showing the rewards long-term investing can bring.

Growth stocks with rapid earnings

Secondly, I try to invest in smaller-scale growth stocks that I usually find on the AIM 100 index. Specifically, I look at firms that have the most rapid earnings per share (EPS) growth over a five-year period. This may give me an indication of the speed at which a company is building. 

Despite this, I’m obviously aware that this growth is by no means guaranteed in the future.

These types of growth stocks may also graduate at some point to the FTSE 250 index, whereupon index tracker funds will add the companies to their holdings and the share prices may possibly rise. This recently happened with a company that I no longer hold, Molten Ventures.

While nothing is guaranteed, history tells me that investing what seems a small amount every month can bring big rewards in the future. With around 30 years until I hit retirement age, I believe my plan could bring it sooner.