Stop saving & start investing! How to build a £1m ISA with FTSE 100 dividend stocks

The 2022 stock market correction may have created a breath-taking buying opportunity for dividend stocks in the UK’s flagship index.

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.

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home

Image source: Getty Images

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.

With all the volatility in the financial markets last year, both growth and dividend stocks have lost a lot of favour with many investors. After all, it’s only natural to run for the hills after a double-digit stock market decline. And many are finding refuge in Cash ISAs and savings accounts.

It’s not hard to understand why. Unless the bank goes under, deposits are near risk-free and provide a steady stream of reliable income courtesy of interest. What’s more, even if the worst comes to pass and a bank fails, the first £85,000 of a depositor’s money is protected by the FSCS.

As the Bank of England hikes interest rates to combat inflation, the allure of savings accounts is getting stronger. And yet, moving all capital into one may actually be a bad move. Even with higher risk-free returns, savings accounts still have historically and continue to lag behind inflation. In other words, they may provide safety but they also dent wealth in terms of spending power.

That’s why investing in top-notch dividend stocks from the FTSE 100 may be the smarter move.

Capitalising on a high market yield

As with every stock market correction, panicking investors have a habit of selling anything with a pulse out of fear. And this indiscriminatory emotionally-driven behaviour often results in terrific companies being put on the chopping block.

As frustrating as this is to watch, it does create potentially lucrative opportunities for income investors. As stock prices drop, dividend yields go up. And providing that cash flows remain uncompromised, these higher payouts are often sustainable.

Looking at the FTSE 100, its average dividend yield in 2021 stood at 3.2%. Following the aftermath of 2022, this now stands at 4.2%. And several dividend stocks within the UK’s flagship index offer considerably more.

According to The Times, as of September 2022, the average interest rate offered by savings accounts in the UK was 0.85%. By direct comparison, FTSE 100 dividend stocks offer more than four times that amount in dividends alone.

Building a £1m ISA with dividend stocks

Instead of putting £750 a month into savings, investors can place this money into a Stocks and Shares ISA instead. And using this capital, they can buy individual dividend stocks to capitalise on the high yields offered by high-quality enterprises today.

Alternatively, investors could simply buy shares in a FTSE 100 index fund to pursue a £1m ISA. Historically, the index has generated an annual return of around 7%, including dividends. And assuming it continues to deliver these returns, investors would have a seven-figure investment portfolio within 32 years.

As exciting as the prospect of becoming a millionaire for minimal effort sounds, it’s critical to remember that, unlike saving, investing has its risks. 2022 was a good reminder that the stock market doesn’t always go up. And once-thriving businesses can end up in the gutter if economic conditions change.

A poorly selected portfolio of dividend stocks may leave investors with considerably less than expected. That’s especially true if the underlying businesses later announce a dividend cut, or outright cancellation, as free cash flow suffers.

However, these traps can often be avoided by investing with due diligence. And given the potential rewards, investing is worth the risk, in my mind.

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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Nvidia stock is becoming more affordable!

Nvidia stock is up 2,500% over five years, but the chip giant’s share split -- announced during its earnings report…

Read more »

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »

Satellite on planet background
Investing Articles

At just under £14, can BAE Systems’ share price still be a prime FTSE 100 bargain? 

Despite its bullish price run, BAE Systems’ share price still looks undervalued to me and appears set for strong growth.

Read more »

Photo of a man going through financial problems
Investing Articles

2 dividend shares I’d avoid like the plague in today’s stock market

The UK stock market is full of high-yield dividend shares that could equate to a steady stream of passive income.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!

Generating a sizeable second income can be life-enhancing and can be done from relatively small investments in high-dividend-paying stocks.

Read more »

Investing Articles

With as little as £300 a month invested, this stock could net £16,000 a year in passive income

Putting a few hundred pounds each month into the stock market could eventually generate a five-figure annual passive income, this…

Read more »