What are the traits needed to maximise our chances of building a long-term passive income? I’ve been checking on Stocks and Shares ISA millionaires at the UK’s biggest investing platforms.
At AJ Bell (LSE: AJB), millionaire ISA holders have 87% of their investments in shares, on average, including investment trusts. The average across other ISA accounts is just 33%.
Barclays conducts annual surveys — and has found the UK stock market easily beating cash savings and bonds for well over a century. And these ISA millionaires are the evidence of the success it can bring.
What about investment trusts? They’re companies that spread investors’ cash over a range of stocks and provide much-needed diversification. Some investment companies handle client funds while having owners’ profits to prioritise. But we buy shares directly in an investment trust — so we’re the owners.
Common theme
Other ISA providers, like Hargreaves Lansdown, also find their ISA millionaires put more into investment trusts and individual shares than the wider UK average.
But which actual shares do the UK’s most successful investors go for? Remember, they’ve achieved millionaire status by investing a maximum of £20,000 a year — and less in earlier years. So are they great at spotting the next big winner?
It doesn’t look like it. AJ Bell’s two most popular picks among millionaires this year are Shell and Lloyds Banking Group. And it was the same two last year.
They’re mature companies with track records of strong cash flow and progressive dividends. Dividends aren’t guaranteed, and sometimes they can be cut. But over the long run they can make quite a difference, especially if we buy more shares with them to compound our returns.
Defensive stocks
Aviva, GSK and BP make up the rest of the top five for the two years — though in different orders. And it strikes me that these all have good defensive moats, in businesses where newcomers would face a very tough task trying to muscle in.
Another company springs to mind that I’d say also has defensive characteristics. It’s AJ Bell itself. If managing investing platforms is such a good business, surely it could make sense to invest in the companies doing it, right?
It’s one of the UK’s best-known two. And almost everyone I know who has a Stocks and Shares ISA uses AJ Bell or Hargreaves Lansdown.
The shares aren’t obviously cheap, on a forecast price-to-earnings (P/E) ratio of 19.5. But we’ve seen a 91% rise in earnings per share between 2021 and 2024, with a further 43% predicted by 2027.
The expected 2.5% dividend yield isn’t that high. But dividends grew 80% in the same three years, with another 30% on the cards by 2027.
The high-ish valuation does seem like the biggest risk, and we could see the share price fall — like it did in 2022. But I think passive income investors should consider it.
What next?
The other key millionaire investor secrets might seem obvious. Invest as much as we can, and get started as soon as we can.
Only individuals can work out what they can afford. But for those who haven’t started yet… the ideal time is surely now.
