Here’s how I can use a £20K Stocks and Dividends ISA to try and build wealth
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As a believer in long-term investing, the term Stocks and Dividends ISA suits me well. By putting money in today and investing it wisely, I can hopefully build a large sum in the years and even decades to come.
Setting goals and an investment plan
Say I had £20k (although the same method would work for smaller amounts, although the results would be equally small).
With wealth building as my goal, I could quickly think of a plan that would help me reach that goal. For example, I can focus on compounding dividends from income stocks, buying growth stocks, or a combination of both.
Regardless of my approach, I would want to reduce my risk by spreading the money over many different stocks. Starting with £20k is enough to do this.
Finding stocks to buy
I would like to avoid a common mistake made by investors who want to increase the balance of their Shares and Shares ISA quickly. That is basically being selfish without being financially realistic.
For example, a stock with an unusually high dividend yield may not continue to pay that level. A share of growth that has doubled in the past year may double in the next year. In any case, just paying attention to what happened in the past does not necessarily tell what to expect in the future.
Instead, I will focus on the core business and how I expect it to perform in the future.
Looking at it for a long time
As an example, consider the share of my income, IM&G (LSE: MNG). His area of work – asset management – is benefiting from high demand and I expect that to remain so. That can translate into bigger bills. In turn, that helps firms like these make profits and pay dividends.
M&G’s policy is to maintain or increase its dividend per share each year. Whether it can do that will depend on how its business is doing. One risk I see is that a troubled market could mean lower asset prices over time, leading to lower M&G profits.
From a long-term perspective, I see a number of strengths for the company including having a well-known brand and a large customer base. Currently, its dividend yield of 10% makes it one of the highest paying dividend groups in FTSE 100.
Getting started now
Buying a diverse range of high quality businesses if they have an attractive share price can help me build wealth in the years to come.
My first move would be to pick the best stocks and shares ISA for me, invest my money and start finding compelling investment ideas.
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