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Thousands of stocks and shares ISAs in the UK today contain more than a million pounds. Each of them started empty.
Can we emulate those long-term success stories?
Unless we are very lucky, we would probably need to be able to invest close to the full £20,000 ISA allocation each year to achieve millionaire status. But we could reach £1,000 a month in passive income with a little less.
This is what counts
It all comes down to three key things:
- How much can we invest each year?
- How long can we leave it there?
- How much can we earn each year?
How much we have is largely an individual thing. I have seen people live a miserable life to save as much as possible. And then retire and die without having the opportunity to enjoy it.
For me it is a balance. I invest everything I can, but I don't deprive myself or my family.
Our schedule also depends. The age we are and the level of final income we need are key. I'll work towards the £1000 a month target and see how long it can take.
stock market Benefits
Finally, how much are we likely to earn each year?
He FTSE 100 has produced an average annualized return of 6.9% over the past 20 years. What stocks can I expect to come close to that in the future? I will choose National Network (LSE: NG.) as an example.
We expect a projected dividend yield of 4.8% by 2025. And if stocks keep pace with inflation over the long term, that could bring the total to around 6.9%.
ISA Balanced Selections
The first thing I notice in the chart above is that stock prices can be volatile. To me, that means three things.
First, I look for stocks that pay decent dividends. Dividends are never guaranteed and are sometimes cut. But they cause me less stress than watching daily stock price movements. And National Grid's dividend has a good track record of stability.
Second, I opt for diversification, to reduce my overall risk in case a stock goes bad. There are enough good dividend stocks in the FTSE 100 to make me feel confident that I can achieve my long-term goals.
Three, I already said it and I will repeat it. In the long term, that's what it's all about.
How much is it worth?
Using the National Grid example, how soon could you earn £1000 a month?
I reckon investing £500 a month for 20 years should be enough. With dividends reinvested, a total annual return of 6.9% could increase that figure to £252,000. And a dividend yield of 4.8% could generate £12,000 a year.
Or with £1,000 a month you could be earning half a million in that time, generating monthly dividend income of £2,000.
There is no guarantee of any of this. And National Grid is just an example, not a recommendation. But buying high quality UK dividend stocks and holding them for a couple of decades is not just my personal top choice, it's my only choice.
