The flexibility of a Stocks and Shares ISA allows investors to pursue a broad range of investing strategies. A popular method is to focus on low-volatility income stocks that pay handsome dividends.
However, for those willing to take on more risk, pursuing shares with better growth prospects can propel a portfolio to new heights much faster.
Both methods are proven strategies for building long-term wealth. But which is the best method for someone looking to invest 100% of their £20,000 annual ISA allowance? Let’s explore.
Growth versus income
Over decades, the majority of investment returns generated in the stock market didn’t originate from growth stocks. In fact, dividend shares as a whole have grossly outperformed.
Let’s look at the US-based S&P 500 index as an example. It’s home to some of the biggest growth stocks in the world, including the likes of Apple, Microsoft, and Nvidia.
Between 1980 and 2020, the index has increased by around 1,790%. This means anyone buying £1,000 worth of shares in a low-cost S&P 500 index fund would have around £17,900 before the pandemic. But if the same investor decides to reinvest all dividends along the way, this return skyrockets to 5,286% – or £52,860!
Clearly, income has pulverised growth. So should investors spend their £20,000 Stocks and Shares ISA allowance exclusively in dividend-paying enterprises? Not necessarily.
As previously highlighted, growth stocks typically carry more risk. They’re usually younger enterprises with fewer resources at hand and a lot of hurdles to overcome. In many cases, these businesses fail to deliver. But every once in a while, a diamond in the rough emerges.
One from my portfolio is medical robotics company Intuitive Surgical (NASDAQ:ISRG). It’s never paid out any dividends to shareholders. And yet, since its IPO in 2000, shareholders have enjoyed returns of 15,137%!
Investing in an ISA in 2023
There have long been debates within the investing community about which style or strategy delivers the best results to the point of controversy. And that’s because the answer isn’t based on the potential gains, but rather on the individual.
Looking at Intuitive Surgical again, the stock price collapsed by roughly 75% within six months of going public. It took over four years to recover before going on an impressive growth streak, only to collapse once again in the 2008 financial crisis. This pattern has continued throughout the last two decades. And even last year, the growth stock was slashed in half during the correction.
Being able to remain emotionally calm and focused during these periods of volatility is essential to be a successful growth investor. And in most cases, especially among investing novices, this is exceptionally difficult.
If I were building my Stocks and Shares ISA from scratch today, I would start by establishing a solid foundation of boring but reliable companies. Once that’s in place, I would begin to venture out into riskier opportunities. After all, nothing stops someone from building a balanced, market-beating portfolio using both growth and dividend stocks.
