Millions of UK investors are sitting on a powerful wealth-building tool that many are not using to its full potential, financial analysts say.
A Stocks and Shares ISA loaded with dividend-paying FTSE 100 companies offers a legitimate route to generating what many describe as passive income, money earned while you sleep.
The strategy involves buying a diversified spread of blue-chip dividend stocks inside the tax-efficient ISA wrapper, then allowing the compounding effect to do its work over decades.
Top UK companies typically reward shareholders with dividends twice a year, with some paying quarterly, and many boardrooms actively try to increase those dividends annually to deliver real-terms income growth.
Reinvesting dividends during working years to buy additional shares, which in turn generate further dividends, can build substantial wealth through the power of compounding over time.
According to data from Unbiased, the average total return from a Stocks and Shares ISA over the last decade stands at an impressive 9.64%, a figure that forms the basis of a striking long-term projection.
An investor who deployed their full £20,000 ISA allowance in a single year and achieved that average return could accumulate a pot worth £316,301 over 30 years, based on that rate of growth.
Drawing just 4% annually from that sum would deliver a passive income of £12,652 per year, while leaving the underlying capital intact to continue growing or be passed on to heirs.
To spread risk effectively, building a portfolio of at least 12 dividend-paying stocks is advisable, so that any shortfall from one or two companies can be offset by stronger performers elsewhere.
One FTSE 100 income stock worth considering within such a portfolio is wealth manager M&G (LSE: MNG), the global asset manager and life insurer that invests almost £350bn on behalf of individuals, institutions, and pension schemes.
M&G was spun off from insurer Prudential in 2019, and its shares have delivered strong returns since, rising 55% over the last five years and climbing a further 36% in the last 12 months alone, with dividends paid on top of those gains.
The trailing dividend yield has moderated to 5.8% following that share price strength, having previously reached as high as 10%, though it remains one of the highest yields available on the FTSE 100 blue-chip index.
Risks remain, and investors should weigh them carefully, as the price-to-earnings ratio on M&G shares has nudged up to 28 following the stock’s strong run, making the valuation look stretched by some measures.
As an active fund manager, M&G also faces ongoing pressure to demonstrate it can outperform low-cost passive rivals such as exchange traded funds, and a broader market downturn could shrink assets under management and compress fee income.
For investors drawn to the stock, a considered approach of feeding money in gradually, taking advantage of any price dips, and holding for the long term gives the compounding effect the time it needs to build a meaningful lifetime income stream.