Up to 20% with a 10% yield? An important choice to consider for a stocks and shares ISA

Buying shares in companies that pay regular dividends has been a popular strategy for UK residents looking to build wealth and generate passive income. I think one of the most effective ways of doing this is through a Stocks and Shares ISA – an investment account that allows UK residents to invest up to £20,000 a year tax-free.

Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be nor does it constitute any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.

It’s no secret that I’m a big fan of investing in dividend stocks, but most of my friends prefer to focus on growth stocks. Why? Some believe that a company’s focus on rapid growth could generate greater returns in a shorter period.

While that may be true, I’m more focused on the long game.

Why I Think Dividends Are Good for Long-Term Wealth

One of the main benefits of investing in dividend stocks is the stable income they can offer. Although dividends are not guaranteed, I find that returns are generally more reliable. This becomes even more evident when you consider the power of compound returns. When dividends are reinvested in the same shares, they can generate additional income, which in turn can be reinvested, creating a snowball effect. Over time, this compounding can lead to significant wealth accumulation.

For example, consider an investment of £10,000 in a portfolio of companies that pay dividends. Assuming an average annual return of 9% (including dividends), the investment could grow to approximately £60,000 after 20 years. This would pay around £5,000 a year in dividends. After retirement, I could withdraw £6,000 a year for 10 years, in addition to dividends.

Of course, investing more money for even longer could increase returns exponentially, although you should remember that gains are not guaranteed.

One of my favorites

A dividend payer I like the odds is now an insurance company Fênix Group (LSE:PHNX). It is a major player in the UK insurance market, operating SunLife and Standard Life, among other subsidiaries. The UK’s aging population has a growing demand for retirement savings and income solutions, which could help increase their profits.

But not everything is easy.

If the economy faces difficulties again, an increase in claims and a reduction in investment returns could harm the group’s financial performance. Additionally, the insurance industry is heavily legislated. Regulatory changes may impact Phoenix Group’s operations and profitability.

In terms of performance, things are a little disappointing. It has fallen 25% in the last five years. However, a recent growth spurt helped it gain 20% last year. If the improving economy can help it maintain that performance, it could become one of my biggest earners in 2025.

It is also in a relatively good financial position, with £9.6 billion in cash reserves and just £3.7 billion in debt. In comparison, another insurer Legal and General it has £28.3 billion in debt and just £15.8 billion in cash. Although it reported losses in its last earnings report, it has a low price-to-sales (P/S) ratio of 0.2. This indicates that your price is cheap compared to your revenue.

With a 10% yield and a history of consistent dividend payments, I found it to be a very attractive option for my income-focused portfolio. Since 2010, annual dividends have increased from 31.8p per share to 56.5p, representing average growth of 2.78% per year.