The ‘most popular’ stocks ISA millionaires are investing in and how you can become one (Image: Getty)
The number of ISA millionaires is growing by the year and they all have a few things in common, an expert has said.
While the average ISA millionaire investing on AJ Bell’s platform is 72, the youngest investor is 36, which “should give encouragement” to anyone putting “as much as they can” into the pot.
AJ Bell investment analyst Dan Coatsworth shared the most popular funds and investment trusts with ISA millionaires today, as well as some top tips for others to achieve the same.
Mr Coatsworth said: “AJ Bell ISA millionaires have shown a preference for investing in individual shares rather than funds, with 75 percent of their portfolios sitting in stocks, including investment trusts.
“Those with larger amounts in their ISA may be better placed to take the higher risks associated with investing in individual equities and have a big enough pool of assets to diversify appropriately.”
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ISA experts share “one of the biggest contributors” to high investment returns. (Image: Getty)
Larger blue-chip names like Shell, Lloyds and GSK are the most popular stocks with AJ Bell customers who are ISA millionaires. Meanwhile, US-listed tech giants including Nvidia, Microsoft and Apple also feature in portfolios.
Still, Mr Coatsworth noted that far more have large-cap dividend-paying stocks from the UK market than overseas-listed stocks, which pay little or no income to shareholders.
This trend could reflect how the average age of AJ Bell’s ISA millionaires is 72, so many customers may be in retirement and want their investments to generate an income.
Mr Coatsworth continued: “If a £1million portfolio yielding four percent generates an income of £40,000 a year, this could be a comfy retirement, especially when you add in state and private pensions.”
According to AJ Bell’s data, five out of the top 10 most popular stocks with AJ Bell’s ISA millionaires offer a “more generous dividend yield” than the highest level of interest paid on the best-buy instant access cash savings account.
People can invest up to £20,000 per year without paying tax on interest (Image: EXPRESS)
Certain stocks in AJ Bell ISA millionaire portfolios offer higher prospective yields including nine percent from M&G, 8.5 percent from Legal & General and 7.9 percent from HSBC.
Mr Coatsworth said: “Cash interest rates have been trending down in recent months amid expectations for the Bank of England to cut rates. In contrast, many stocks on the market continue to pay a growing stream of dividends which reinforces the attraction of equities over cash for many investors.
“You don’t have to pay any tax on the gains you make from savings or investments in an ISA or on any income you receive from these investments.”
According to Mr Coatsworth, dividend reinvestment has historically been a way to boost returns in an ISA portfolio, due to compounding benefits.
He explained: “Using dividend money to buy more shares allows an investor to increase their ownership of a stock without investing more capital.
“They should receive even more dividends at the next round of distributions due to their increased ownership, and the company might have even grown its dividend as well. When you repeat this cycle over the space of decades, the compounding benefits can really shine through and boost the investor’s wealth.”
AJ Bell ISA millionaires also show a preference for solid, established businesses that have been doing the “same thing” for decades.
Mr Coatsworth added: “There are few speculative, blue-sky companies in their portfolios that have a bright idea but do not generate revenue. There also appears to be a buy-and-hold mentality given the number of spin-offs in the ISA millionaire portfolios. Shares in Haleon, Woodside Energy and Jackson Financial were distributed free of charge to GSK, BHP and Prudential shareholders as the parent companies restructured and demerged holdings.
“These gifted stocks look as if they’ve been left alone in investors’ portfolios rather than the usual temptation of cashing out of a demerged business.”
Popular funds ISA millionaires are investing in
According to AJ Bell data, Fundsmith Equity is the “most popular fund” with the platform’s ISA millionaires.
Mr Coatsworth said: “It has a quality/growth investing style which means it looks for companies that can generate strong returns, have rock solid balance sheets and have quality characteristics, such as strong brands or high levels of recurring revenue.”
While Fundsmith has underperformed the broader global stock market over the past three years, Mr Coatsworth noted: “Its longer-term track record is good and AJ Bell ISA millionaires might have felt comforted parking their money in such a fund.”
Additionally, choosing funds that invest in companies around the world delivering strong levels of earnings growth is a “common theme” among ISA millionaires as there are other popular global equity names alongside Fundsmith. Mr Coatsworth said: “These include Rathbone Global Opportunities and Lindsell Train Global Equity.”
He added: “It makes sense that a buy-and-hold investor wants to spread their risks by not focusing on a single country, while at the same time avoiding more speculative companies and backing ones which are either market leaders, market disrupters or have enduring qualities.”
Popular investment trusts ISA millionaires are investing in
The idea of backing tomorrow’s potential market leaders is appealing to investors who are happy to risk their money in blue sky companies, Mr Coatsworth said.
Doing so through an investment trust can help spread the risks across a portfolio of companies with bright ideas but not necessarily any profits.
Mr Coatsworth said: “That explains why Scottish Mortgage is by far the most popular investment trust among AJ Bell’s ISA millionaires, with twice as many people holding it versus the second most popular product.
“Scottish Mortgage might have had a tough few years, but it has enjoyed quite a few bumper periods in the past and many investors have stuck with it through thick and thin.”
City of London Investment Trust is also widely held amongst ISA millionaire investors, providing exposure to large-cap stocks on the UK market.
Mr Coatsworth said: “Some view this as a ‘best ideas of the FTSE 100’ trust, appealing to people in retirement who want to collect a regular stream of dividends. Income is also the reason why HICL Infrastructure is the third most popular trust on our list, having gained a reputation for paying out big dividends.”
How to become an ISA millionaire
Investors can put up to £20,000 into a Stocks and Shares ISA each year. To illustrate how people might get to £1million, Mr Coatsworth said: “Investing the full amount at the start of each tax year and achieving an annual seven percent total return through either capital growth, dividends or both would mean you hit the milestone after 21 years, assuming the allowance doesn’t change.
He added: “The youngest ISA millionaire with AJ Bell is just 36 years old which should give encouragement to anyone putting as much as they can into their ISA to achieve a seven-digit figure.”
Mr Coatsworth shared a few additional tips to get there, such as starting early and remaining consistent, having a diversified portfolio to spread the risk, and reinvesting dividends.
Mr Coatsworth said: “Companies and funds often pay dividends every three to six months.
“Think of these as rewards for taking the risk of owning their shares or fund units. While it can be tempting to pocket that income stream to spend on yourself, history suggests one of the biggest contributors to investment returns is reinvesting dividends.”
