The Motley Fool

Why I invest 60% of my ISA in FTSE dividend stocks

In an article published earlier this month, I explained how I invest the money within my Stocks and Shares ISA. To recap, I invest around 60% of my capital in FTSE dividend stocks (with a strong focus on companies growing their dividends) and the remaining 40% in growth companies listed both in the UK and internationally.

Here, I’ll look at some of the reasons why I invest the majority of my ISA money in dividend stocks.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Passive income

The first reason is I like the passive income they provide. With dividend stocks, I get paid a second income stream for doing absolutely nothing, irrespective of what the stock market is doing. My ultimate goal is to build an income stream from dividend stocks (tax-free within the ISA) that I can retire on.

Financial flexibility

Next, I enjoy the financial flexibility dividends provide. When I receive a cash dividend it gives me options. I can spend the cash if I want to, or I can reinvest it. Currently, I reinvest all my dividends. However, it’s nice to know that if I needed some extra cash flow for some reason, I could turn to my dividend income.

More certain returns

I also like the fact dividend payments are quite a reliable source of investment returns (although they’re not guaranteed). Compared to capital gains, which are highly uncertain, there’s more certainty of a return. In finance, this is known as the ‘bird in the hand’ theory (i.e. a bird in the hand is worth two in the bush).

Two sources of profit

Another benefit of dividend stocks is that they provide me with two potential ways to profit – from the dividends received and also from capital gains. This is particularly advantageous when stock prices are falling. Dividends also take a lot of the stress out of investing as you can profit without having to constantly buy and sell.

Strong performance

Research also suggests dividend-paying companies (particularly those that consistently increase their dividends) tend to generate excellent returns over time. For example, a study by analysts at Ned Davis Research found that between 31 January 1972 and 31 December 2018, dividend-paying companies in the S&P 500 index outperformed non-dividend-paying companies by a wide margin.

Compounding power

I’ll also point out that dividends stocks enable me to take advantage of one of the most powerful forces in investing – compounding. By reinvesting my dividends, I can buy more shares which, in turn, gets me more dividends for the future.

Portfolio stability

Finally, dividend stocks tend to be less volatile than growth stocks, as dividend-payers are generally well-established companies that have strong balance sheets and reliable cash flows and profits. This, in theory, means my portfolio is likely to fall less during a bear market, which provides peace of mind.

Overall, there are many advantages to investing in dividend stocks. In my overview, it’s a simple, yet effective, way of investing for the future. 

A top income share with a juicy 5% forecast dividend yield

Income-seeking investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!

But here’s the really exciting part…

Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...

He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!

Views expressed 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.