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So a stocks and shares ISA is only for people who have a lot of money to invest, right?
No, that's simply not true. In fact, I think it might be the best way for ordinary people like us to improve our long-term financial health.
Now we hear about ai tech stocks, how they're worth trillions of dollars… and how they could crash at any moment. Scary stuff.
But here in the UK, I think we have a unique opportunity to greatly reduce risk and establish a good second stream of income for the coming years.
Wealth from dividends
It all comes down to two key things.
First, we have many FTSE 100 Index stocks that generate consistent profits and pay great dividends. And even though the stock market has been recovering in 2024, I still see plenty of buying offers.
There are also the benefits of a stocks and shares ISA. An ISA protects our earnings from tax and allows us to invest small amounts on a regular basis. With the provider I use, I can pay as little as £25 a month.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
How much does it cost?
How much would our modest £200 a month amount to? Let's look at an example.
I rate National Network (LSE:NG.) as one of the best long-term income investments in the FTSE 100 index. But let's take a quick look at the share price.
The chart shows that the shares fell at the end of May. The company surprised the market with a new £7 billion share issue to raise capital for the development of its energy distribution networks.
I think the market overreacted, but this shows one of the risks of stocks. Even the most boring company can sometimes generate the wrong kind of enthusiasm. This means we should really stick to a diversified selection of stocks.
The magic of composition
Still, the fall has pushed the expected dividend yield up to 6%. It's not the highest in the FTSE 100, with a handful of stocks up more than 9%. But I think it could be one of the most reliable.
Suppose the share price will rise by a further 2% per year, in line with the UK's inflation target.
To increase that kind of return, we should invest our dividend cash into buying more shares.
And an investor who starts today and continues for the next 20 years could end up with more than £110,000 saved – from as little as £200 a month.
Risk vs reward
Now, that's just one example, and things can go wrong. If National Grid were to decide to raise more money in the future, that could again shake investor confidence.
And in all companies, we should not only pay attention to dividends. Debt and cash flow are two of my most important criteria.
But the UK stock market has had an average annual return of around 7% over many decades. I reckon a diversified ISA portfolio focusing on dividend-paying stocks has a good chance of beating that figure.