Becoming a Stocks and Shares ISA millionaire is possible. It might take years, decades even, but a regular investment plan combined with the tax-free wrapper an ISA provides could build a million-pound portfolio.
Everything that goes into an ISA, including dividends and capital gains from investments, is entirely free of tax, so long as the annual contribution limit (currently £20,000) is not breached. An ISA investor can reinvest any proceeds in their entirety, boosting the growth of the portfolio.
There are many strategies for building wealth inside a Stocks and Shares ISA. The choice depends on the amount of risk an investor is willing to bear, and their level of investing confidence.
One option is to invest in multiple big, mature, dividend-paying companies. The FTSE 100 and FTSE 250 indexes are where an income investor should be looking for companies with broad economic moats and that have consistently paid dividends over the years.
Shares in AstraZeneca, GlaxoSmithKline, British American Tobacco, and Unilever have traditionally fit the bill as reliable payers of chunky dividends. Regularly investing over time will build up the number of shares owned, and the total dividends paid. Reinvesting the dividends increases the share count and total dividends even further.
Add in some share price appreciation along the way, and a £1m ISA portfolio becomes closer to reality.
Another, potentially riskier, option is to look at well-run mid- and small-cap companies that pay dividends. Here the plan is to pick up dividends along the way, but also benefit from higher rates of share price growth, or perhaps a takeover.
The FTSE SmallCap Index and lower end of the FTSE 250 are good places to look for suitable companies. Smaller companies that are growing their revenues at a good pace, and have low levels of debt and plenty of cash, are good targets.
Like with the bigger companies strategy, regular contributions and reinvested dividends will increase shareholdings over time. However, smaller, growing companies should see their share prices increase, boosting the value of the portfolio.
Takeovers of smaller companies are not uncommon, and shareholders usually get bought out at a premium. The proceeds can be ploughed back into the portfolio.
Swinging for the fences is not for the faint-hearted. There is substantial risk involved in investing in the likes of oil and gold exploration companies, biotech outfits, and startups. However, for those willing to accept the risk, rapid portfolio growth is possible. The growth will almost certainly be from price appreciation alone, as these types of companies do not usually pay dividends.
The FTSE AIM All-Share Index should prove fertile hunting ground. Younger companies are tricky to assess. They don’t have much of a track record and often have novel products or ways of doing things. But there are success stories. Shares in Boohoo, an AIM-listed online fashion retailer, have increased in price by 1,370% over five years, for example.
If an investor is not comfortable picking stocks, then they can invest in funds that will do it for them. There are also index tracker funds that invest in entire markets and don’t try to pick stocks at all.
Whatever the choice, the only way to build towards a £1m-ISA is to open one and start contributing to it.
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James J. McCombie owns shares in GlaxoSmithKline and Unilever. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended boohoo group. 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.