The Stocks and Shares ISA is a terrific way to build wealth. But the real benefits only reveal themselves over time.
The last decade has been particularly good as stock markets have barrelled along nicely, driven by US tech. Lately, the FTSE 100 has joined in the fun, with the UK’s blue-chip index up 50% in the last five years.
The total return is even better. That’s because British stocks offer some of the most generous dividends in the world with the index typically yielding 3.5% a year lately. That compares to around 1.1% for the US S&P 500, where growth is the main attraction. With dividends reinvested, the total FTSE 100 return will be closer to 70%. Reinvested dividends turbocharge returns over time.
What should I do with my dividends?
Ideally, Stocks and Shares ISA investors should plough every dividend they get straight back into their portfolio while of working age, and only consider taking them as income after hitting retirement.
A popular way to build retirement wealth is to invest in a spread of UK shares from the FTSE 100 and FTSE 250, offering both dividend and growth capability. Many British investors rightly like to spread their wings, and invest in the US too. So what’s been their reward?
Financial adviser site Unbiased crunched the numbers and found the average Stocks and Shares ISA has grown at an annual compound rate of 9.64% a year over the last decade. That would have turned a £12,000 stake in 2016 into £30,121 today.
As I said, the real benefits emerge over time. Over 30 years, growth of 9.64% a year would turn £12k into a massive £189,781. While inflation will have eroded its value in today’s money, that’s still an incredible return.
Are Aviva shares worth a look?
One UK stock I admire is FTSE 100 insurer and asset manager Aviva (LSE: AV). It shares have been on an absolute tear lately, rising 67% in five years. During that time, it’s typically yielded around 7%. That would push the total return towards 110%. It’s more than doubled investors’ money.
Of course, past performance is no guide to the future. After such a strong run, the Aviva share price is likely to slow. There are signs it’s flattening out, climbing just 9% over the last 12 months.
I expected the shares to be more expensive but the forward price-to-earnings ratio is just 12.6. That’s pretty modest. The forecast yield is 6.2% this year and 6.7% in 2027, which is pretty good.
There are risks though. The recent £3.7bn acquisition of Direct Line may confirm Aviva’s general insurance dominance, but also poses integration and operational risk. Potentially, the rise of self-driving cars could hit demand for motor insurance at some point in the future. Insurance will always be a competitive market.
Yet I still think Aviva is worth considering with a long-term view as part of a balanced spread of companies in a Stocks and Shares ISA. I’d buy it myself if I wasn’t already heavily exposed to other financial stocks.
Should you invest £5,000 in Aviva Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aviva Plc made the list?
Harvey Jones does not hold any positions in the companies mentioned.
