My simple plan to get rich by investing in UK dividend stocks

UK dividend hero stocks, reinvestment of income, and a tax-free Stocks and Shares ISA are key components of my plan to build real wealth.

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

My plan for getting rich from investing in UK stocks is so simple. First, open a Stocks and Shares ISA. Second, buy reliable dividend-paying stocks and reinvest the dividends for the long term. Hunting for triple-digit return stocks in the next big thing is not necessary to build real wealth. In fact, reducing the tax paid (legally) on modest and sustainable returns can make me a rich man as well.

Tax-free Stocks and Shares ISA

The single biggest decision I made that improved my investment return was to open and use a Stocks and Shares ISA (Investment ISA). Any gains made on stocks or funds bought inside such an ISA are completely tax-free. Interest and dividend income do not attract any tax either.

In the table below, the results of investing £100 at various returns and time horizons with and without a 30% tax rate are compared. The higher the investment return, and the longer the investment, the bigger the impact of tax-free investing.

A table showing how tax free investing, which a Stocks and Shares ISA provides, significantly improves performance compared to investing in a taxable account

For example, an investment earning 15% for 25 years with zero tax ends up being worth 171% more than if returns were taxed at 30% annually. Investing in a zero-tax environment is the easiest way to supercharge returns.

UK dividend stocks

Growth stocks have their place in my portfolio, but I won’t shun dividend-paying stocks. Jeremy Siegel, a finance professor, found that investing in slower-growing, dividend-paying companies often outperformed backing the high-growth, new and exciting ones. The explanation offered is that investors pay too much for shares in fast-growing companies because they overestimate future growth. Furthermore, dividend yields are low on growth stocks, which limits the number of shares accumulated through reinvestment of dividends.

Reinvesting dividends is the critical factor in determining investing success in the long run, reckons Siegel. I agree with him. Those that disagree may point to a chart of the FTSE 100 (full of big dividend-paying companies), which has barely gone anywhere in years.

However, those charts do not usually consider dividend reinvestment. A £10,000 investment in the FTSE 100 at the start of 1986 would have grown to about £54,000 by 2020 without dividend reinvestment. But, the same investment with dividend reinvestment would have grown to about £196,000. Dividend reinvestment almost doubled the annual average return from 5% to 9%.

Long-term, tax-free, dividend reinvestment

The core of my tax-free Stocks and Shares ISA portfolio consists of UK dividend hero stocks like Diageo, GlaxoSmithKline, and Unilever. I reinvest all the dividends I receive, meaning I buy more of the stocks that paid the dividend. Companies that have got to the stage where they can return cash to shareholders in the form of dividends, or share buybacks, might be considered dull. But the long-term investment returns on offer from these types of companies are not.

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.

James J. McCombie owns shares of Diageo, GlaxoSmithKline, and Unilever. The Motley Fool UK has recommended Diageo, GlaxoSmithKline, and Unilever. 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 Investing Articles

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

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

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

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

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »