Up 20% on a 10% yield? Top choices to consider in a Stocks and Shares ISA

Buying shares in dividend paying companies has long been a popular strategy for UK residents looking to build wealth and generate income. I think one of the most effective ways to do this is through a Dividends and Dividends ISA – an investment account that allows UK residents to invest up to £20,000 a year tax-free.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

It's no secret that I'm a big fan of investing in dividend stocks, but most of my friends prefer to focus on growth stocks. Why? Some believe that the company's focus on rapid growth can bring big returns in the short term.

While that may be true, I'm more focused on the long game.

Why I think stocks are good for long-term wealth

One of the key benefits of investing in equity stocks is the stable income they can provide. Although the benefits are not guaranteed, I find the returns are generally very reliable. This is even more evident when considering the power of compounding returns. If the profits are reinvested in the same stock, they can generate additional income, which can then be reinvested, creating a snowball effect. Over time, this combination can lead to the accumulation of great wealth.

For example, consider a £10,000 investment in a portfolio of dividend paying companies. Given an average annual return of 9% (including dividends), the investment could grow to around £60,000 after 20 years. This will pay around £5,000 a year in dividends. After retirement, I could withdraw £6,000 a year for 10 years in addition to benefits.

Naturally, investing more money over a longer period of time can quickly add up to returns, although I must remember that returns are not guaranteed.

One of my favorites

Dividend payer I like the chances at the moment it's an insurance company Phoenix Group (LSE: PHNX). It is a major player in the UK insurance game, operating SunLife and Standard Life, among other subsidiaries. The UK's aging population presents a growing need for retirement savings and income solutions, which can help increase their income.

But it's not all sailing.

If the economy takes another hit, increased claims and reduced investment returns could hurt the group's financial performance. Not only that, the insurance industry is heavily regulated. Regulatory changes may affect the performance and profitability of the Phoenix Group.

Functionally, things are disappointing. It has decreased by 25% in the last five years. However, recent growth has helped it gain 20% over the past year. If a booming economy can help it continue that performance, it could become one of the top earners by 2025.

It is also in good financial shape, with £9.6bn in cash reserves and just £3.7bn in debt. By contrast, the insurance partner Legal & General it has debt of £28.3bn and cash of just £15.8bn. Although it reported a loss in its latest earnings report, it has a low price-to-sales (P/S) ratio of 0.2. This indicates that its price is cheap compared to its income.

With a 10% yield and consistent dividend payout history, I found it a very attractive option for my income-oriented portfolio. Since 2010, annual dividends have increased from 31.8p per share to 56.5p, representing 2.78% annual growth on average.