A Stocks and Shares ISA can be an effective way to grow a portfolio. As the realised profits from selling a stock or receiving a dividend are exempt from tax, this can speed up the process. So if an investor focused on income shares and reinvested the proceeds, here’s how quickly an ISA could double in value.
Focusing on the yield
The beauty of this strategy is that it isn’t really dependent on how much an investor can afford to buy. An ISA with £1k in it needs to follow the same idea as one containing £100k. The main principle to focus on is the rate of return. When using income shares, this is typically measured via the dividend yield.
At the moment, the FTSE 100 dividend yield is 3.06%. Yet within the index, there are plenty of other options with higher yields. As a result, I think it’s reasonable to target an annual yield of 7% in the ISA. When dividends are received, the money would be used to buy more of the stock, effectively compounding the rate of growth even faster, rather than just spending the funds.
If an investor simply adds a notional amount in the ISA and didn’t top it up, it could double in value by year 10. Of course, this isn’t guaranteed. Over the course of a decade, a lot could change in financial markets. This means that companies might cut dividend payments or face a host of other risks.
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A FTSE 100 gem
One example of an income stock that fits the target remit is M&G (LSE:MNG). The company has a current dividend yield of 7.26%, with the stock up an impressive 43% in the last year.
One major factor in the gains has been due to strong client inflows. In the most recent quarterly update, the company revealed £1.8bn in net inflows for the period. This meant that year-to-date, it had attracted £3.9bn worth of inflows. This is key because M&G charges for managing the money. As a result, there’s a strong correlation between higher earnings and higher assets under management.
This brings us to the dividend. We’ve seen five straight years of increased dividend per share payments, and I think this will continue. Looking ahead, there’s a growing structural demand for retirement and income products. This is partly based on an ageing population, as well as continued support for general investment.
Of course, no business is perfect. I think one risk is the exposure to lower interest rates in the UK. If we get sudden cuts in 2026, it would act to lower profitability in annuities and savings products.
Despite this concern, I think it’s a good income stock and one that could be considered for investors pursuing an ISA growth strategy.
