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Investors looking to build long-term wealth inside an ISA should consider how much income they’d realistically like to target. Hitting £1,000 a month sounds a good starting point. It would add up to £12,000 a year. Using the 4% withdrawal rule, which means the capital shouldn’t run dry, they’d need a pot of roughly £300,000.
From next April, the full new State Pension will be worth £12,547.60. Anyone who can build their ISA to generate £12,000 tax-free will almost double that figure, with every penny of that income sheltered inside the wrapper. That’s the beauty of a Stocks and Shares ISA. Cash ISAs have their place as a safe haven, but history suggests equities deliver superior long-run returns.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
I put most of my focus on FTSE 100 dividend shares. They’ve powered countless retirement pots, and when spread across sectors they offer a level of diversification that can help smooth out the bumps.
FTSE 100 stock selection
The idea of saving £300,000 may feel intimidating, but it’s doable given time. Let’s say the investor already has £25,000. If they invested £100 a month and got an average annual total return of 7%, with dividends reinvested, they’d beat that target in 30 years. Invest £200 a month, and they’d do it in 25 years.
The stock market won’t make investors rich overnight. Instead it builds wealth steadily, as share price growth and reinvested dividends roll-up and compound over the years.
BP is a dividend giant
Oil giant BP (LSE: BP.) is a FTSE 100 dividend stalwart. It’s been a building block of portfolios for decades, although lately its progress has been bumpy.
When the oil price shot up in 2022, after Russia invaded Ukraine, the shares flew. But when oil fell, so did BP. Its ill-fated flirtation with green energy didn’t help. But now it’s back to what it knows best, and investor confidence is returning.
The BP share price is still up 130% over the last five years, with dividends on top. They would lift the total return towards 150%. The shares are climbing today, up almost 20% in the last 12 months. And the dividend is pretty good too, with a trailing yield of 5.3%.
The board has also been treating investors to share buybacks, which should further boost returns over time. Future performance isn’t guaranteed. A lot depends on the oil price. Until recently that was expected to fall next year amid an oil glut, but OPEC+ members have responded with plans to cut production. These things will always be uncertain.
Yet, I think BP shares are well worth considering for income-focused investors who hope to generate a bit of share price growth on top. They must understand the risks. BP’s net debt is still high at around $26bn and a weak global economy could hit demand. But the business looks more focused, more disciplined, and more committed to rewarding shareholders.
That’s just one option. There are plenty of exciting dividend and growth stocks on the FTSE 100 today. Building retirement wealth takes years, so there’s no time to lose.
