Buying FTSE 100 shares inside a Stocks and Shares ISA is a brilliant way of building wealth for the future. As well as generating growth when stock markets rise, many UK blue-chip stocks pay income too, via dividends. The combination of the two can be a killer way of making money, especially for investors who reinvest their dividends to buy even more stock.
I still think too many savers are missing a trick by leaving long-term savings in cash. Shares are more volatile, yes, but should grow faster over time, even with the bumps we’ve had lately.
I’d love to max out my £20,000 ISA allowance each year, but like most people, that’s way beyond my means. Still, even smaller sums can go a long way.
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.
Big income, bigger risks
One of the highest-yielding stocks on the index is Rio Tinto (LSE: RIO). It offers a trailing dividend yield of 7.44% today, although that’s expected to fall to 6.35% in 2025, and 6.2% in 2026. That’s still a healthy income though, easily beating best-buy savings rates that stand at around 4%.
Rio Tinto’s fortunes are tied to global demand for metals, especially from China, and that’s been fading. Property market problems, an ageing population and a trade spat with the US have all taken their toll.
On 19 February, Rio Tinto still reported a 15% increase in net earnings to $11.6bn, which was encouraging. But the dividend was cut by 8%, and earnings per share dropped by the same amount.
The Q1 update, published on 16 April, showed how stormy this year has been so far — literally. Four cyclones disrupted iron ore shipments from Pilbara in Western Australia, leading to the weakest start to a year since 2018. Rio’s fixing the damage, and longer-term projects like lithium and high-grade iron ore are still moving ahead.
Cheap for a reason
The Rio Tinto share price has fallen 20% in the last 12 months. That’s painful, but also means the stock now looks reasonably valued. It trades at just 8.5 times forecast earnings, well below the FTSE 100 average of 15.
That doesn’t guarantee a rebound, especially with global demand still weak and interest rates staying higher for longer. But the analyst community’s surprisingly upbeat. Fourteen out of 21 say Buy, with none rating the shares a Sell. The median one-year price forecast is 5,400p. That’s almost 30% above where the stock trades today. Dividends are on top.
Personally, I think that’s all a tad optimistic. However, I still think the shares are worth considering with a long-term view.
Dividend potential
Let’s say an investor puts £5,000 of their ISA into Rio. This assumes they already own a broad spread of shares, so they aren’t putting too many eggs in one basket.
Given this year’s 6.35% yield, they’d pocket £318 in dividends over the next 12 months. That’s a handy bit of income from a relatively small stake. Someone who puts in the full £20,000 across a range of high-yielding FTSE 100 stocks averaging 6% could collect £1,200 a year, or £100 a month.
Any investment growth would come on top of that. Combined, they could snowball over time into something much bigger. Like I said, a great way to build wealth. Free of tax too.
