Many investors open a Stocks and Shares ISA and dream that one day it’ll be worth a million pounds.
The UK has a growing cohort of ISA millionaires. The first to publicly declare he’d achieved that status was Lord John Lee.
However, it’s no good just dreaming about becoming an ISA millionaire, what’s needed is a workable plan to aim for that goal.
Here are three ideas to build into that plan.
1. Invest in growth shares
The UK stock market regularly produces multi-bagging stocks. That means share prices that increase manyfold in value, often over a decade or so.
Recent examples include Melrose Industries, Ashtead, Judges Scientific, Halma, London Stock Exchange Group and others.
Not all earnings-growing businesses will multi-bag their share prices. However, that’s no reason to avoid trying to find some of the next potential super-growth stocks.
One or two big multi-year winners in a portfolio can make a big difference to its performance and take an investor closer to that magic million.
2. Invest in dividend-growing businesses
A big part of the overall returns from the stock market can arrive in the form of shareholder dividends. It can be wise to invest in firms that have a good record of growing their dividends each year, then reinvest the dividends into buying more shares.
That way, gains can compound in a portfolio to help edge it closer to that £1m goal.
For example, FTSE 100 company Coca-Cola HBC has a ‘clean’ dividend growth record, meaning it’s raised the shareholder payment for the past few years.
The compound annual growth rate (CAGR) of the dividend is running at just over 10%. But it’s not the only dividend-growing enterprise to focus on right now.
Another is Begbies Traynor (LSE: BEG), the business recovery, financial advisory and property services consultancy.
However, this is a much smaller outfit with a market capitalisation of just under £177m (25 March), which compares to around £9bn for Coca-Cola HBC.
Smaller outfits can be volatile. There’s also some risk because Begbie Traynor’s assets are its skilled personnel. The talent in the company could leave at any time. Nevertheless, it can be a good idea to diversify a portfolio by company size including large-, mid- and small-caps.
One reason for that is smaller firms often deliver higher growth rates. Indeed, Begbies Traynor is another with a clean dividend record. The CAGR of the shareholder payment is running near 9.63%, on par with Coca-Cola HBC.
Meanwhile, with the share price in the ballpark of 111p, the forward-looking dividend yield is just below 3.8% for the trading year to April 2025. That level of income compares well to the average of the wider stock market running near 4%.
3. Cut losses
Despite thorough research and an investor’s best efforts, some stock investments won’t work out as planned.
Investors can often improve their returns if they systematically cut losses along the way. For example, Lord Lee is on record as saying he sells a stock when the price moves 20% against him. Other investors use even tighter limits.
Investing with a long-term perspective can work well for the winners. But so can impatience with the losers!