It’s possible to become a millionaire by building a portfolio of dividend shares inside an ISA, but it takes time. Too many people think of the stock market as a way to get rich overnight, but it’s never been that.
Instead, equities are a great way of building wealth slowly and steadily. Taking some risks, but not too many. Since 1985, the FTSE All-Share has delivered an average annual return of 8.45% a year, according to new figures from Standard Life. It turned an original investment of £10,000 into £200,000 by the end of 2022.
Taking my time to build wealth
That’s impressive, but it took 37 years. It’s possible to speed up the process though, by investing more than £10,000. This financial year, UK adults can invest up to £20,000 in a Stocks and Shares ISA, and take all their returns free of income tax in capital gains tax.
If I could afford to invest £20,000 before the 5 April ISA deadline, and my portfolio grew by 8.45% a year, it would take me 49 years to become a millionaire. That’s impressive, but I have two problems with that scenario. First, I will be dead long before I’m rich. Second, I don’t have £20,000.
A better option, and I would imagine this would apply to most people, is to invest a regular sum every month. Let’s say I could afford to put away £500. That adds up to £6,000 a year, all the way to retirement if I can afford it.
Starting from scratch it would take me 32 years to hit a million, assuming an annual average total return of 8.45%. If I increased my contribution by 3% a year, I could get that down to 30 years. It’s doable, for those who start early enough, and can afford £500 a month.
I’d buy individual FTSE stocks
I could make a million a lot faster, if I went flat out. If I upped my investment to £20,000 every year I would have £1m after 19 years, assuming the same growth rate. Sadly, I can’t afford that. I’ll invest £500 a month plus lump sums when I have cash to hand.
Instead of buying a FTSE 100 tracker and passively following the index up and down, I would aim to get a superior return by investing in individual dividend-paying stocks. This is riskier, of course, as even apparently solid blue-chip stocks can crash and burn.
I would reduce the danger by building a portfolio of around 12-15 companies, focusing on solid FTSE 100 dividend income shares. Even though the index is at an all-time high, it’s still only trades at 10.7 times forecast earnings, well below its long-term average.
Today’s valuation is pretty much irrelevant if I invest money every month. Then there’s no need to worry about market timing, I simply buy shares one month, then more the next, and more the next.
While it would be nice to make £1m, it’s only a theoretical target. If I fall short, no problem. I’d still be a lot better off than if I had never invested in shares at all.
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.
