I’m sure anyone who already has a million in a Stocks and Shares ISA won’t need any ideas from me. And there are quite a few investors who’ve hit that milestone.
In fact, estimates suggest there are around 4,000 ISA millionaires in the UK. And the biggest pots are up around a stunning £8m.
But for those of us who don’t have a million in our ISAs yet, are we fated to just look and dream? I don’t think so. I reckon we could stand a better chance of making it than we might think.
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Pick a stock
Let’s pick one of my favourite UK stocks and see where that might lead us. I think the UK banks are way to cheap right now, so I’ll go with NatWest Group (LSE: NWG).
The banks do face a risky year, with high interest rates racking up their bad loan provisions. And NatWest faces a possible government sell-off later this year, which I expect would depress the share price.
But with a forecast dividend yield of 7.2%, it’s a firm millionaire candidate, in my eyes.
Compound magic
A 7.2% dividend might make a nice extra bit of spending cash. But the trick is to avoid that temptation, and use it to buy more shares.
That way, I’d start my second year with 7.2% more NatWest shares. And the year after, 7.2% more, plus 7.2% of that extra 7.2%… Sound complicated? Let’s see how much it could add up to.
If I could use up my whole ISA allowance each year, my NatWest shares could be worth a million in 22 years. And as it happens, that’s the average time it’s taken our UK millionaires to get there.
Some took longer, even starting in the days of PEPs. But that also means some of those 4,000 will have hit a million a good bit sooner.
Less cash?
Even if we can’t manage the full £20k each year, we shouldn’t give up hope. Putting away £10k a year could still get us there in 30 years.
Now, we should stop for a moment and think about that. If we invest only half the amount each year, we reach our million in just another eight years. That’s only 36% longer. And it’s all down to the compound value of those early years.
I don’t expect the NatWest dividend or share price to remain the same. And I’d never risk all my cash on a single stock. No, I always want diversification in my ISA.
Keys to a million
But using NatWest as an example does, I think, show up the keys to making a million in an ISA. The secret is to use up as much of our allowance as we can. Put it into quality stocks that generate cash, and reinvest the dividends. And then just wait.
Even if we don’t aim for a million, the same approach could help us achive our maximum long-term gains. And that’s what stock market investment is all about.
