March is just about the last chance for UK investors to use this year’s Stocks and Shares ISA allowance. I think if someone uses their full allowance each year for 30 years, becoming a millionaire is a realistic aim.
Building a £1m portfolio over 30 years using annual deposits of £20,000 involves earning a 4% annual return for every one of those years. Despite the FTSE 100 this year being more expensive than it’s ever been, I think that’s still achievable.
Dividends
One way of becoming an ISA millionaire is by investing in dividend stocks. These are shares in companies that distribute part of their income to shareholders.
Using this approach, I could reinvest the money I received to buy more shares, increasing my future dividends. And I could keep doing this until I reached a million.
The easiest way to do this involves buying stocks offering a return above 4% today and hoping that the business maintains its payouts in the future. Taking this approach, I’d buy shares in Legal & General.
At today’s prices, the stock has a dividend yield of 8%. As long as the company’s payments don’t fall significantly, I should achieve my target.
Growth
Instead of increasing the value of my portfolio by buying more shares, I could also look to buy shares that will increase in value. This involves investing in growth stocks.
Shares in growth companies increase in value because the businesses retain their earnings and reinvest them to generate more cash in future. As a result, the value of their stock should increase.
If I were taking this approach, I’d buy shares in Halma. It does pay a dividend, but its real value comes from the growth of its business.
Over the last decade, the company has increased its earnings per share by an average of 10% a year. If it can continue to do so, it could get me to my target after 30 years.
Aiming for a million
There are different strategies I could try. But there’s no rule that says I have to stick to only one of them.
When I invest, I try to focus on whatever I think the best opportunity is. Sometimes that’s a dividend stock and sometimes it’s a growth stock.
Doing this allows me to develop a diversified investment portfolio. By concentrating on whatever I think the best opportunity at the time is, I’ll eventually have a collection of different investments.
If I were investing £20,000 in March, I’d probably look to buy shares in Diploma. The stock has a dividend yield of around 2%, but it’s real attraction is as a growth stock.
Diploma’s revenue has grown at an average of 13% per year over the last decade. And the company’s size means I think it can continue for some time, helping me reach my million pound target.
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.
