Investing within a Stocks and Shares ISA can be a great way to build wealth.
According to HM Revenue and Customs (HMRC), the number of ISA millionaires in the UK has surged to more than 4,000.
The rules say we can invest as much as £20,000 in an ISA each year. Then that money can grow via investments without attracting tax.
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However, not many people have that much money free each year to bung into shares. So I’d plan to invest just £497 a month, which adds up to £5,964 a year.
Small beginnings can lead to big things
But that lesser amount would still have the potential to make a big impact over time and may lead to a portfolio worth a million.
US multi-billionaire investor Warren Buffett reckons America’s S&P 500 index has delivered compound annual gains running at just over 10% since the 1960s. If I can replicate that rate of return, it would take around 29 years to build an investment of £497 a month into a pot worth a million.
Buffett’s own record over the same period is almost double that 10% average annual return. But, of course, there are no guarantees I can match Buffett’s performance or that of the S&P 500.
Nevertheless, those ISA millionaires have clearly performed well. But most played the long game because the process of compounding can lead to bigger gains over time.
Another important factor is careful business selection. That means doing plenty of initial research before buying any particular stock.
Like most investors, I keep my best ideas on a watch list and aim to execute the purchase of shares at opportune moments. For example, right now I like the look of Bakkavor (LSE: BAKK).
Trading well and improving
The company is a UK-based provider of fresh prepared food in the UK, US and China, which it supplies to supermarkets and other outlets.
Trading has been going well and the progress reflects in the share-price chart.
September’s half-year report shows more progress with the numbers. The outlook statement declares the directors are “confident” the firm will deliver profit ahead of expectations for 2024.
Meanwhile, City analysts have pencilled in a 22% jump for normalised earnings this year and just over 10% for 2025.
I like the food sector for its defensive characteristics. Firms like Bakkavor are often less affected by the ups and downs of the economy than some others. Nevertheless, the stock comes with its risks.
The economic shocks of the past few years have caused the business difficulties and that shows in the poor multi-year earnings record. Part of the problem is the operating margin is quite low, running at about 4.9%. It’s possible challenges may continue over the coming years.
Nevertheless, chief executive Mike Edwards said restructuring activity is supporting the company’s 2024 performance. The directors are focused on rebuilding margins and they are “excited” about developing a stronger business as general economic conditions improve.
On balance, and despite the risks, I’d research and consider Bakkavor for inclusion in a diversified long-term portfolio now. After all, with the share price in the ballpark of 152p, the forward-looking dividend yield for 2025 is a tasty 5.4%.
