A Stocks and Shares ISA is the perfect vehicle for trying to build wealth over the long term. That’s why I invest in one every month, come rain or shine.
Here, I’ll outline three strategies that investors might want to consider for an ISA.
The income approach
The first is one focused upon stocks that pay dividends. As I move into middle age (insert crying face emoji), dividends are beginning to form a bigger part of my overall portfolio strategy.
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John D. Rockefeller purportedly said: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
I don’t know if I’d go that far — I also derive a lot of pleasure from eating pizza — but it’s certainly nice to see income flowing passively into my ISA.
When reinvested, dividends fuel compounding. For example, a £20,000 ISA that yields an average 7% would grow to £39,343 after 10 years, due to the power of reinvested dividends and compound interest.
By then, that 7%-yielding portfolio would be generating roughly £2,754 in annual dividends.
Of course, dividends are never guaranteed to be paid. Therefore, it’s crucial to have a diversified income portfolio, with multiple dividend-payers.
But here’s the rub: high-yield income shares rarely go up much in value. That’s because these blue-chip companies tend to be in mature industries where growth opportunities are limited.
For example, ever-popular Lloyds shares offer a 5.4% yield, but have fallen 14% in value over five years. Poor ongoing share price performance like this could reduce overall returns. This is worth considering.
Go-go growth
The second approach is to invest in shares with much higher growth prospects. These stocks have the potential to produce life-changing returns over the long term.
Indeed, every few years, a handful of growth shares rise exponentially and make early backers a lot richer.
Nvidia stock, for example, is up 2,085% in just five years!
The catch here is that many of these stocks only seem like no-brainer buys with the benefit of hindsight. And it’s easier said than done to keep holding a stock that’s already up massively. The temptation to take some chips off the table can be overwhelming.
Finally, growth shares are rarely cheap. So there’s the very real danger of massively overpaying for a company that suddenly stops growing or never turns a profit.
For every Nvidia, there are hundreds of growth stocks that lose investors money.
Bit of both
A third approach I’m a fan of is investing in growth stocks that pay a respectable yield. One I own is Greggs (LSE: GRG). Shares of the beloved baker are up 21% in five years.
However, the firm has an excellent record of raising its annual dividend. With the stock yielding 2.4%, these payouts can bump up the overall return.
Greggs’ long-term goal is to operate 4,000+ shops across the UK, up from 2,559 in September. So the company still appears to have plenty of growth potential left in the tank.
One possible risk is the upcoming hike in minimum pay and national insurance contributions. To offset these costs, Greggs will have to add a few pennies to its products, potentially impacting sales.
Overall though, I reckon Greggs stock offers a great balance of growth and income potential.
