Image source: Getty Images
Millions of Britons invest inside a Stocks and Shares ISA, and it isn’t hard to see why. The main draw is that all returns are free of income tax, dividend tax and capital gains tax.
The tax wrapper’s also flexible, with a generous annual £20,000 limit on contributions, and the option to make withdrawals at any time. Yet the real benefits of investing in the stock market come from sticking with it, rather than dipping in and out.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Buy shares and hold them
When I buy a stock, I do so with the intention of holding for the long term, which means years and ideally decades.
If I pick the right stock, I can more or less forget about it, while steadily reinvesting every dividend I receive, to buy more shares. Later, I might draw those dividends as income, but only after I’ve retired. This gives my holdings plenty of time to compound and grow, which is the real way to make money from shares.
The average long-term total return on the FTSE 100, including share price growth and reinvested dividends, is 8% a year.
Now let’s say an investor tucked away £250 a month for 30 years. That sounds like a long time but investing a big enough pot for retirement takes time (unless you’re lucky enough to earn big money).
After 30 years, those contributions would roll up into £367,038. Investors could get with a lot more, if they increased their contributions every year to maintain their real value after inflation.
If they invested in a blend of shares with an average yield of 6% year (which is at the higher end of the FTSE 100 income scale), they would generate income of an impressive £22,022 a year. Not a bad return from £250 a month, and could help to secure a more comfortable retirement, once added to the State Pension and other sources of income.
FTSE 100 dividend stock
The average dividend yield on the FTSE 100 today is around 3.25%, but some shares pay more, such as a favourite of mine, wealth manager M&G (LSE: MNG). Today, it offers a trailing yield of 7.73%. That’s more than double the index average. At this time last year, it was yielding closer to 10%.
The yield has only fallen because the share price has risen, by an impressive 30% over 12 months, and more than 50% over five years. All dividend income is on top of that.
M&G was formed in October 2019 when it was hived off from FTSE 100 insurer Prudential, but it has a long track record and reputable track record as an active fund manager.
It’s done pretty well given the wider economic and market turbulence of the last few years, but no stock’s without risk. The rise of index-tracking passive ETFs are a challenge to its active fund model, while stock market volatility could hit assets under management and drive disgruntled investors away.
Every stock has risks. I still think M&G’s worth considering today for investors looking to generate a high-and-rising dividend income as part of a balanced Stocks and Shares ISA portfolio.
This story originally appeared on Motley Fool
