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A Shares and Shares ISA is an ideal vehicle for trying to build wealth over time. That’s why I plant one every month, come rain or shine.
Here, I will outline three strategies that investors may want to consider with an ISA.
An income stream
The first is one that focuses on dividend-paying stocks. As I enter middle age (insert crying face emoji), dividends are starting to form a bigger part of my portfolio strategy.
John D. Rockefeller is said to have said: “You know the only thing that makes me happy? It’s seeing my assignments come in.”
I don’t know if I could go that far – I get a lot of joy out of eating pizza too – but it’s really nice to see a little income coming into my ISA.
When replanted, fuel compounding assignments. For example, a £20,000 ISA yielding an average of 7% will grow to £39,343 after 10 years, thanks to the power of reinvested dividends and compound interest.
Meanwhile, that 7% yielding portfolio would be generating around £2,754 in annual dividends.
Of course, dividends are not guaranteed to be paid. Therefore, it is important to have a diversified income portfolio, with multiple dividend payers.
But here’s what might be helpful: high-yield stocks rarely go up in value. This is because these blue-chip companies are often in mature industries where growth opportunities are limited.
For example, always popular Lloyds the shares offer a 5.4% yield, but have fallen 14% in value over five years. Sustained share price underperformance like this can reduce overall returns. This is worth considering.
Go-go growth
The second way is to invest in stocks with high growth potential. These stocks have the potential to generate life-changing returns over the long term.
Indeed, every few years, a number of growth stocks rise rapidly and make the old backers very rich.
Nvidia the stock, for example, is up 2,085% in just five years!
The catch here is that many of these stocks don’t appear to have been bought with the benefit of hindsight. And it’s easier said than done to keep a stock that’s already skyrocketed. The temptation to take the chips off the table can be overwhelming.
Finally, growth stocks are rarely cheap. So there is a real risk of overpaying for a company that simply stops growing or never turns a profit.
For all of Nvidia, there are hundreds of growth stocks that are losing money for investors.
A bit of both
My third favorite method is to invest in stocks that pay good yields. One that I have Greggs (LSE: GRG). Shares of the beloved baker are up 21% in five years.
However, the company has an excellent track record of increasing its annual profits. Since the stock yields 2.4%, these payments can increase total returns.
Greggs’ long-term goal is to operate 4,000+ stores across the UK, up from 2,559 in September. So the company still seems to have a lot of growth opportunities left in the tank.
Another possible risk is an increase in the minimum wage and national insurance contributions. To reduce these costs, Greggs would have to add a few pennies to its products, which would affect sales.
Overall, I think Gregs stock offers a great balance of growth and income potential.
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