How can we make a million from the UK stock market? Ask the country’s 2,000 ISA millionaires, and we’ll find them buying a lot of high-yielding dividend shares and holding for the long term.
Few successful investors got their wealth from get-rich-quick multi-baggers. And they don’t waste money in charges by chopping and changing with short-term trading.
Over the past 10 years, Stocks and Shares ISA returns have averaged a whopping 9.6% per year. A good chunk of that is from dividends, which the most successful shareholders reinvest.
A good dividend year?
It looks like 2023 might be an especially good year for piling money into dividend stocks.
Before the pandemic, 2018 was the best year ever for FTSE 100 dividends, with a total of £85.2bn paid out. According to AJ Bell‘s Dividend Dashboard, 2023 could be set to beat it. Forecasts indicate a new record of £85.8bn.
Let’s think how close we might get to making a million through buying some of the UK’s top FTSE 100 dividend shares.
An 8% example
Taylor Wimpey has one of the big forecast dividend yields right now, at 8%. Investing £100 a month at 8% a year could generate £18,000 in 10 years. In 20 years, it could soar to £52,000. That’s from a modest monthly £100. Anyone with £1,000 a month to invest could reach £1m in 26 years.
The property slump might put pressure on dividends in the short term. But it’s also lowered share prices, helping us lock in better long-term yields.
Diversified selection
A few shares cluster around the 7-8% dividend level. They include investment firm M&G on an 8.5% forecast, and British American Tobacco, with a predicted 7.4%. Mining and commodities giant Glencore boasts a potential 7%.
This says an important thing to me. It means we can put together an attractive selection of high-yield dividend stocks with good diversification.
For me, diversification is a vital component of successful long-term investment. Second only to the long-term approach itself, I’d say.
Is the FTSE 100 cheap?
The number of top dividends also makes me think FTSE 100 shares across the board are good buys at today’s valuations. It’s not just one or two sectors, like banks, whose dividend yields make them look undervalued. It’s the stock market itself.
The FTSE 100 as a whole looks set to deliver around 4% in dividends in 2023, based on current estimates. Forecasts are liable to change, of course. But that’s a pretty good return in my book.
It includes all the stocks currently paying nothing, like Rolls-Royce and Ocado, together with a lot of very low-yielders.
Selective target
If we select from the among the higher yields, I think it’s entirely plausible to target 5-6% in dividends while maintaining good diversification. Some shares traditionally considered safe also offer good yields now, like Tesco‘s 4.6%. Even Unilever is on 3.6%.
These potential returns don’t include a penny in share price gains. And I’d expect some good appreciation there too, over the long term.
There’s obviously no guarantee. But I really do think a million from dividend shares can be a realistic ambition for long-term UK investors.
