Regular investing is the key to building a future nest egg. If you have £500 per month to save, then you’re in a fortunate position. This amounts to £6,000 per year, which is easily offering you the opportunity to build long-term wealth.
An ISA is a better alternative to a regular savings account because it makes investing in the stock market simple and accessible. £500 a month is a decent amount of money and saving it in cash is not the wisest solution, because it will depreciate with inflation.
Although the stock market carries risk, this is generally offset by the risk-reward it offers. As our current UK interest rates are low and unlikely to rise soon, cash savings are depreciating. The stock market offers real possibilities of 4%, 5%, or even 10% returns, plus the opportunity for compound investing via dividends, which can create real-life ISA millionaires.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
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Start small in an ISA and little by little you can build towards a handsome lump sum.
Diversify
I like to diversify as it spreads the risk and makes my portfolio more interesting. Diversification can be done in two ways, via a selection of asset types, such as cash, stocks, index funds and bonds, or through a variety of stock market sectors, such as technology, energy, financial, and pharma. With a regular investment, such as £500 per month, over time you can build a portfolio using both techniques.
FTSE stocks
If I was to invest a regular £500 per month, I’d alternate between buying a FTSE stock and investing in funds.
I’d alternate between FTSE 100 stocks and FTSE 250 stocks. The reason I’d stick to these two indices, to begin with, is that the companies in them are generally better established than the companies found on AIM and therefore less at risk of major fluctuations in price.
FTSE companies tend to have a high net worth and include the top 350 UK companies ordered by market capitalisation. The top 100 are constituents of the FTSE 100, which comprises the 100 most highly capitalised blue-chip companies listed on the London Stock Exchange. The next 250 belong to the FTSE 250, which represents approximately 15% of UK market capitalisation.
You can also gain exposure to the FTSE 100 as a whole by investing in FTSE exchange-traded funds (ETFs) or tracker funds, such as iShares Core FTSE 100 ETF.
An example FTSE 100 stock I’d buy today is Vodafone and for the FTSE 250, I’d choose Tate & Lyle (LSE:TATE), a food ingredients and additives manufacturer and supplier.
Sweet returns
Tate has a price-to-earnings ratio of 18, its dividend yield offers a great compounding opportunity at 4%, and earnings per share are 29p. Its debt ratio is reasonably low at 29% and adjusted half-year results, which were released in early November, were positive.
An additional selling point is that the Tate dividend has been stable for 21 years. The company’s its involvement in healthy ingredients, such as sugar alternatives, is also a drawing me to this stock. Tate’s Sucralose division manufactures zero-calorie artificial sweeteners and many of its other ingredients are geared to reduce fat, calories, and sugar, while adding fibre. As we are living in an increasingly health-conscious environment, I think this company is well placed to continue delivering growth and positive returns.
I looked at this FTSE 250 stock for 2020 back in August and still consider it a good buy.
