The yearly deposit limit of £20,000 in a Stocks and Shares ISA looks a touch intimidating when you think about it. While it’s nice that this investment vehicle offers tax-free investing up to such a large amount, how many Brits are capable of stashing away nearly two thousand quid a month to get to that figure? Not many, I’d imagine.
The thing is, newbie investors don’t need to be saving five-digit sums every year to get the advantages of ISAs. Even smaller amounts in the hundreds could end up being worth a surprising amount in the final calculation. Let’s take a look at how much a single £100 stake could be worth for an investor putting it into a Stocks and Shares ISA today.
Years of application
A commonly given return for investing in the stock market is 10% a year – the rough yearly average over the last hundred years or so. That would turn our £100 into £110 in the first year, not exactly turning anyone into Mr Moneybags. But if we extend the time invested to more than one year, then compound interest gatecrashes the party.
There are all sorts of ways you can show how powerful compound interest is – thought exercises using chessboards and grains of rice and such – but perhaps the simplest is to show what happens to £100 after many years of applying the same return.
Over 20 years, the £100 becomes £672. Over 30 years, it becomes £1,744. And over 40 years, it becomes £4,525.
It’s worth stating that even £5k is still not Mr Moneybags territory. And there is also the danger that the next few decades will offer lower returns than historical levels. But save and invest £100 monthly from a day job consistently and you start to build up wealth that might even be life-changing.
Dividend payers
That’s all very well and good, but how is the money received in our Stocks and Shares ISA? One way is through dividends paid by a company from its earnings. This is cash that goes straight into the account, which is why many investors like the look of big dividend payers like Legal & General (LSE: LGEN).
After the recent panic in the markets following the conflict in Iran, the dividend yield has jumped to 8.55%. It was a fair bit lower only a month ago. This shows how buying in at a low point can increase our return. However, the share price could fall further too.
Another benefit to companies is their inflation-resistant properties. The insurance and wealth management services Legal & General offer are often charged as a percentage, making earnings simple to increase as the value of money lessens. That makes them more attractive than a Cash ISA, which sometimes offers a return that doesn’t keep pace with the changing value of money.
On the whole? The stock market is a proven method of building wealth but it does have its losers along with its winners. I think Legal & General has a good chance of being the latter in the coming years and, in my view, is worth considering.
