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3 simple steps to becoming an ISA millionaire

Do you want to become an ISA millionaire? If so, read on because in this article I will show that it is entirely possible with a long enough timeframe and a sound strategy in place. But first a question: why invest in an ISA? If you do not know already, an ISA is a tax-efficient way to save or invest up to £20,000 a year. You will not be taxed on any gains you make and that could be a crucial boost to help you get to the £1m figure. 

Step 1: Invest in dividend payers

Why invest in dividend payers? Dividends can only be paid out of profits so investing in dividend payers is an easy way to sift out the companies that aren’t profitable. More than that, dividends are usually a good indicator of a company that is able to convert profit to cash, which is a good thing, because as the famous saying goes – cash is king. Thirdly, it is often the case that dividends show an alignment between the interests of directors and shareholders, particularly when the former group owns a significant proportion of the shares. Dividends are not a cast iron guarantee of profitability of course, so it is always important to research your stocks carefully. 

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Step 2: Invest in companies with growing dividend yields

There is a trap which investors can fall into and that is investing in the companies with only the largest dividend yields. But a more nuanced approach could deliver better results to take you towards achieving a million pounds. Instead of simply investing in the highest dividend yields, I would check the yield against the growth in the yield. A flat yield indicates that a company is struggling to grow, which will affect the rate at which the share price will increase and limit the income for an investor over the long term. It is far better to find a share that has an above average dividend yield which it is capable of growing year after year.

Step 3: Invest in companies growing their operating profit

Operating profit is a valued metric of legendary investor Warren Buffett, as he deems it less susceptible to accounting tricks than, for example, earnings per share (EPS). Operating profit shows the profit earned from a company’s ongoing core business operations, thus excluding deductions of interest and taxes. Companies that are able to grow their operating profit year-on-year ought to be able to increase their share price over the longer term, even if over shorter periods the company or industry falls out of fashion with investors (this happens all the time). 

Investing is more complicated than these three steps and I’d also advise doing plenty of research before investing in any share but as a starting point for investing within an ISA with the goal of reaching a million, these steps could be a big help. It is worth remembering, with a 40-year timeframe it would take £378 a month, growing at 7.5% a year, to reach the £1m, meaning it is entirely possible to achieve the goal. 

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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.