How I’d invest £10k today: an ISA filled with FTSE 100 dividend shares

This strategy is simple but effective and could power you on to become an eventual ISA millionaire.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I reckon a Stocks and Shares ISA is a smart way for most investors to own shares listed on the stock market. You can put up to £20,000 per year into your ISA, and your gains from investing in shares within the account will be free from tax.

That means no capital gains tax if your shares go up, no tax on dividends you receive, and no income tax when you finally withdraw money from your ISA, perhaps in retirement. However, the money you pay into your ISA will be net of any liability you have for income tax, so there’s no tax relief for money on the way into the ISA.

You could aim to become an ISA millionaire

Nevertheless, Stocks and Shares ISAs can work well as part of your retirement savings planning, alongside other vehicles such as Pension Schemes. You’ve probably heard about the increasing list of investors declaring themselves to be ISA millionaires, for example. By investing no more than the maximum allowances each year into Stocks and Shares ISAs, some investors have invested their way to funds of at least £1m, which strikes me as a fund large enough to provide a decent financial retirement alongside the State Pension.

And it’s not necessary to invest in racy, high-risk shares to achieve decent returns. In fact, you probably don’t have to look beyond the firms in the FTSE 100, which contains the UK’s largest public limited companies as measured by their market capitalisations.

Indeed, one popular strategy is to forget about chasing capital gains from rising share prices altogether and to focus on locking in decent income from dividends instead. By constantly reinvesting dividends, you can compound your investments within the Stocks and Shares ISA. And if you’ve chosen your investments well, capital appreciation from rising share prices could ‘take care of itself’.

Avoiding cyclicals and what I would buy

To me, the best dividends come from firms that have strong trading niches in markets with a minimum amount of cyclicality. So, for a long-term holding period, I’d forget about the big dividend yields we often see from firms operating in highly cyclical sectors, such as banking, house building, retail and others. Because of the ebb and flow of the macroeconomy, we could see profits, share prices and dividends cycling up and down with those types of firms, which could make it hard to achieve a decent overall return in the long run.

Instead, I’d target companies in sectors such as fast-moving, branded consumer goods, tobacco, utilities and others. Such firms tend to experience steady demand for their products and services whatever the economic weather, which often leads to stable incoming cash flows and shareholder dividends.

Finally, as well as looking for big dividend yields, I’d also consider smaller yields if the dividends are growing each year at a decent rate. In such cases, we often see decent share-price growth over time too, which could really boost your returns.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share 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.

More on Retirement Articles

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

2 UK shares that could help set up a SIPP for decades!

Our writer explains the long-term appeal he sees in one British share he already owns in his SIPP -- and…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Here’s how I’m aiming to become a Stocks and Shares ISA millionaire!

I'm confident that a regular investment in FTSE 100 and FTSE 250 shares could supercharge the size of my Stocks…

Read more »

Investing Articles

3 top tactics that ISA millionaires use to strike it rich!

Ever wondered how ISA millionaires manage to make such enormous wealth? Here, Royston Wild divulges some of their greatest strategies.

Read more »

Investing Articles

Can a Stocks and Shares ISA help me retire early?

This Fool is confident that using his Stocks and Shares ISA will allow him to give up work early. Here…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Cash vs Stocks and Shares ISAs: here’s where I’m investing in 2024!

Cash and Stocks and Shares ISAs are both excellent products for the modern saver and investor. But which is the…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how I try to find brilliant shares for my SIPP

Christopher Ruane shares the approach he takes when hunting for shares to buy and hold in his SIPP as he…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

3 FTSE 100 and FTSE 250 stocks I’d buy to target a £31,188 passive income!

Royston Wild explains how a regular monthly investment in FTSE 350 stocks could be the key to long-term wealth creation.

Read more »

Investing Articles

How I’d try to turn a small ISA into £1,000,000 with this savings trick!

Regular investment in a tax-efficient Stocks and Shares ISA could be an effective way to build long-term wealth. It could…

Read more »