FTSE 100 shares are a great way of building wealth for the future, and can even make ordinary people tax-free millionaires.
There are now thousands of Stocks and Shares ISA millionaires across the UK, and they are much more likely to hold shares than the typical investor, AJ Bell says. This confirms what we believe on the Fool, that building a portfolio of individual stocks can be superior to investing in funds.
Top stocks
There are no guarantees, of course. As AJ Bell points out, holding shares is more “likely to deliver more volatile returns and the possibility of both outsize gains or losses”. Personally, I reduce these risks by building a balanced portfolio of stocks and holding for the long term. The average ISA millionaire holds 28 stocks. I’m boiling mine down to around a dozen.
The top 10 holdings among ISA millionaires are FTSE 100 favourites: Shell, Lloyds Banking Group, BP, Scottish Mortgage Investment Trust, Aviva, GSK, Rio Tinto, HSBC, Diageo and National Grid.
I would happily hold any of them, but if I was topping up my portfolio today, I would start with Aviva (LSE: AV) and Diageo (LSE: DGE).
Insurer Aviva is already on my buy list because it combines a cheap valuation (10.53 times earnings) with a high yield (6.23% a year). While many FTSE 100 stocks are more expensive following the recent rally, Aviva largely missed out. Its share price is up 22.1% over one year, but down 7.23% over five.
This morning it delighted investors by posting a 35% rise in annual operating profit to £2.2bn, smashing consensus estimate of £1.75bn. Aviva also announced a £300m share buyback and upgraded dividend guidance to low-to-mid single digit growth.
That commitment to shareholder payouts is good news because I would buy Aviva for dividends rather than growth. Its share price has gone nowhere for years (although it’s up 3.54% today). Which brings me to another secret of ISA millionaires. While many fixate on capital growth, reinvested dividends will do much of the portfolio’s heavy lifting.
I’d buy this for dividend growth
Spirits giant Diageo’s shares have a very different profile to Aviva. They look expensive, trading at 23.32 times earnings, while the dividend yield is much lower at 2.16%. So why would I buy it?
By contrast to Aviva, I would expect Diageo shares to deliver growth as well as income. They may only have risen 5.97% over one year, but over five years they have climbed an impressive 45.12%. That compares to 9.73% for the FTSE 100 as a whole.
Diageo’s share price growth has inevitably reduced the yield but dividend per share progression is impressive. The payout climbed from 65.3p in 2018 to 68.57p in 2019, then to 69.88p in 2020, 72.55p in 2021 and 76.18p in 2022.
In January, Diageo reported a 15% jump in operating profits to £3.2bn, as it passed on price increases to customers and sold more premium spirits. Diageo shares aren’t cheap, but they almost never are.
As ever, there are no guarantees. If people suddenly stop drinking, Diageo would struggle. Nobody becomes an ISA millionaire without taking a few risks.
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.
