Let’s get straight down to it: what’s their secret?

ISA benefits

There are a number of habits these successful people rely on to create wealth. One is to start early and invest regularly, to take full advantage of the compounding process. Also, reinvesting interest and dividends, to amplify the power of compound gains.

ISA users also benefit from the huge tax advantages they receive. Over time, these can be considerable. All interest on the Cash ISA, and capital gains and dividends in the Stocks and Shares ISA, are protected from tax. The result? You keep more of what you earn, which then generates additional returns non-ISA users don’t enjoy.

But here’s the thing. These tax benefits aren’t enough to generate enormous wealth over time. Ultimately, what separates the ISA millionaires from the rest is where they put their money.

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.

So what are they buying?

The data suggests these successful people are prioritising stock market investing.

Rathbones says that “with global equities delivering annualised returns of 17.4% since April 2023, conditions are similar to those previously associated with rapid growth in ISA millionaire numbers“.

Past performance isn’t always a reliable guide to the future. And by historical standards, that 17.4% return is pretty excellent. But even with a far lower 8% annual return, Rathbones predicts the number of millionaires could have trebled again by April 2026, to a whopping 17,600 for those that use their full £20k ISA allowance.

Is it likely that Cash ISA savers could also make a magic million or more? I’m highly doubtful, with the average yearly return of 2% lagging far behind the 8% long-term stock market average.

Here’s what I’m doing now

The good thing about my Cash ISA is it’s essentially risk free. This is unlike my Stocks and Shares ISA, where any capital I invest can fall as well as rise in value.

So what’s my strategy, then? Roughly 80% of my money’s in the stock market, and the remaining 20% held in cash. This way I manage risk according to what I’m comfortable with, while still having the chance to make a million or more.

Another tactic I use is to invest in a broad range of shares. Defensive heroes like Coca-Cola HBC (consumer staples) and Target Healthcare (medical real estate) help balance the risk I take with growth shares including Games Workshop (leisure) and HSBC (LSE:HSBA) (banking).

I’m considering increasing my holdings in HSBC when I can next invest. Why? Its delivered an average annual return of 15.2% over the past decade, through share price gains and dividends. I’m confident it can continue delivering stunning returns as its Asian growth markets take off.

I think the FTSE 100 bank will also benefit from expansion into fast-growing areas like asset management, along with the possibility of higher-than-normal interest rates. That’s even though elevated rates can dampen broader economic growth. More juicy dividends and share buybacks could give my returns an added boost.

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Such concerns are understandable – a crash can be a scary thing. In reality though, a stock market crash may actually be brilliant news for someone looking ahead to their retirement and hoping to retire early.

An opportunity to buy more for less

That is because of what happens during a market crash. Typically, a large number of shares become available at a much cheaper price (the standard definition of a stock market crash is a fall of at least 20% in short order).

Some of those shares suddenly get cheaper because they were badly overvalued. Or perhaps their future prospects have worsened due to a weakening economy. Some shares that fall during a crash never recover.

But others are shares in blue-chip companies whose long-term prospects ultimately turn out to be largely unchanged. So they might suddenly be available at a terrific price.

Such windows of opportunities can be short-lived, so it pays to be prepared. For example, I see now as the best time to make a list of great companies I would like to invest in, if I could do so at attractive prices.

If I wait to start thinking about that when the next crash comes (whenever that might be) I may not then have enough time to act.

Retire sooner… like this

In practice, taking that proactive approach could mean that somebody hits their retirement goals sooner. For example, HSBC (LSE: HSBA) currently offers a dividend yield of 4.1%. That strikes me as attractive and is well above the FTSE 100 average.

Compounding £10,000 at 4.1% annually, it would take 18 years to double in value. I ought to add that, in practice, share price changes would affect this, not just dividends, but I use this example for the sake of simplicity.

But someone who bought HSBC shares in the dark days of autumn 2020 would since have seen their holding rise 376% in price.

Not only that, but they would now be earning a yield of around 19.5%. Compounding at that rate, £10,000 could be doubled not in 18 years but in just four!

I’m getting ready while I wait

In fairness, there were concerns in 2020 about what lay ahead for banks, including HSBC. The dividend was suspended.

I do not plan to buy the share now, partly for similar reasons. I have concerns about what the risk a weakening global economic outlook could have for bank profits.

HSBC’s heavy Hong Kong exposure means that global trade flows can ultimately have a significant impact on its business.

After the share’s stunning rise in recent years, I do not feel the current price offers me sufficient margin of safety for that risk. That is despite HSBC’s proven model, strong profitability today and large customer base.

But the point is clear. Being prepared to swoop in and grab blue-chip bargains during a stock market crash can help someone achieve their retirement financial goals years or even decades early.

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For this reason, I’m building a nest egg with a diverse mix of global shares, trusts, and funds with ISAs and SIPPs. I’m confident the growth shares I own will help me raise the value of my portfolio over time. Meanwhile, the dividend shares I’m holding could give me enormous passive income I can reinvest, also helping me to grow my wealth.

The question is, how large does your Stocks and Shares ISA need to be to give you a comfortable retirement?

First step

The first thing to do is work out how much you need to live comfortably. And this involves calculating the size of the State Pension. For someone who’s made full National Insurance contributions, that figure today is roughly £12,548.

Next, we need to think about what the average retiree needs for a comfortable lifestyle. According to workplace pensions body Pensions UK, this stands at £43,900 for a single-person household.

That leaves a shortfall of £31,352 to be made up with an additional income stream. The exact figure will differ from person to person — not all retirees have the same goals or broader financial circumstances. Yet that gives us a good starting point.

Now let’s work it out

With this worked out, the next question we need to ask is: how much does your ISA need to be for that £31,000+ annual income? If I used my nest egg to invest in 7%-yielding dividend shares, I’d need £447,900 by the time I reach retirement.

That’s a lot of cash at first glance. But over a period of two-three decades until retirement? In my view, it’s a very achievable target.

As I say, I personally like to invest in a range of both growth and dividend shares, split roughly 50/50 in my portfolio. With this, I’m confident of achieving a 9% average annual return over the long term, made up of:

• 5% in capital gains, driven by periods of economic growth when stock markets typically take off.
• 4% in dividend income, providing a steady stream of cash even during weaker market conditions.

A top FTSE 100 share

Many of the stocks I own have provided even better returns, making up for some underperformers in my portfolio. Take FTSE 100 stock HSBC (LSE:HSBA), which has given me the best of both worlds.

During the last five years alone, this blue-chip bank’s risen a whopping 193% in value as profits have surged, helping me to grow my portfolio. With an average 6% dividend yield over the period, too, it’s provided me a healthy stream of passive income.

Can it keep delivering, though? I think it can, though I’m mindful of the threat challenger banks pose in Asian markets. HSBC has considerable brand power and financial clout to capitalise on this fast-growing continent. And it’s putting these to good use, building rapidly in areas like wealth management and making acquisitions like Hong Kong’s Hang Seng bank (which it completed in January).

As part of a diversified portfolio, I think HSBC shares can help me build a significant second income for retirement.

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It’s easy to understand why. The idea of cash quietly rolling in while you’re asleep, on holiday, or watching Netflix sounds far more appealing than endlessly swapping time for money. 

But there’s a catch. Truly passive income rarely starts off passive. Usually, there’s the upfront investment of either time or money (often both), and the income isn’t ultimately guranteed. 

Still, over the years, I’ve researched (which took time) and gradually bought (money) a number of income-paying stocks that now require very little day-to-day effort on my part. They’re nowhere near making me retirement money yet, but they’re steadily doing their thing in the background.

Want to know which dividend shares are paying me tax-free passive income streams while I sleep? Read on and I’ll tell you, including one of my favourites right now. 

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.

What are dividends?

Through dividend-paying shares, investors can aim to receive regular cash payments simply for holding the company’s stock. Even better, many UK shares currently offer dividend yields way above the interest rates available on savings accounts.

In 2026, companies in the FTSE 100 are expected to dish out a record £88bn in dividends to shareholders, according to investing platform AJ Bell. If so, that would beat last year’s total. 

Naturally, dividends are never guaranteed, as companies can cut them during tough periods. Today, the war in Iran is certainly adding a fair amount of uncertainty and risk.

Still, I love the long-term potential because dividends can compound over time. Reinvesting those payouts into more shares can gradually create a snowball effect in my portfolio. That’s the aim.

A £750,000 portfolio that eventually yields 9%, through dividend growth and reinvestments, would generate £67,500 a year in income. 

High-yielders

Now, I should point out that not all of my portfolio is focused on passive income. Today, I hold quite a few growth stocks that pay little or no income.

However, a handful of the shares I do hold (in the table below) offer very chunky dividend yields.

Note, the first three of these are due to pay dividends within the next two months. And because they’re held in my Stocks and Shares ISA, the income will be tax-free.

Which is my favourite?

Obviously, I like all four of these shares, but my favourite right now is HSBC. The banking giant reported earnings earlier this week, sending the share price down 5%. Coincidentally, this puts the forward dividend yield at about 5%.

However, the quarter looked resilient, with underlying revenue rising 4% to $19.1bn and pre-tax profits stable at $10.1bn. There was strong growth in its wealth management division, which has been a key focus for the Asia-focused lender.

While the Middle East situation adds near-term risk and is clearly holding back growth, full-year guidance was maintained.

But it’s the longer-term growth across Asia that appeals to me as a shareholder. With a massive presence in Hong Kong, HSBC is positioned as a bridge for capital flowing in and out of mainland China. Then there are long-term growth opportunities in India.

HSBC stock’s trading at a reasonable 10 times forward earnings, so doesn’t look overvalued. I think it’s worth considering for passive income.

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Let’s start by looking at what went right for so long. Investors had identified HSBC as a terrific way to gain access to fast-growing Chinese and Asian market, where it generates up to 70% of its profits. It does so from its comfortable berth on the FTSE 100, where it has to meet exacting corporate governance standards, making it feel a bit safer.

Like all the big blue-chip banks, HSBC has benefited from higher interest rates, which allowed it to widen the margins between what it pays savers and charges borrowers. Having finally shaken off the financial crisis, it was all systems go.

What’s troubling this FTSE 100 blue-chip?

I benefited from the banking stock surge via Lloyds but I wanted to broaden my net and buy another bank or two. Yet I was also wary. After such a strong run, there was bound to be a bump in the road at some point. And HSBC hit it three days ago, when it published Q1 2026 results.

The core business looked pretty healthy, with a 4% rising underlying revenue to $19.1bn. Net interest margins remain high, and its wealth business is powering along. But there was bad news too. The headlines focused on a $400m loss on loans to collapsed shadow bank Mortgage Financial Solutions. This came shortly after rival Barclays reported a $300m loss.

They were further loan impairments, some down to the Middle East conflict. Reported profit before tax fell $100m to $9.4bn year-on-year. I’ve been worried about the shadow banking sector for a while, but that didn’t stop me. HSBC shares dropped 5.2%. Seconds later, I bought them. What was I thinking?

I like buying good companies on bad news

I’ve been hanging on for a moment like this. Yes, Q1 results were a mixed bag. HSBC’s generous share buyback programme remains on hold. Integrating its recent purchase of Hong Kong’s Hang Seng bank will take time and money, and the synergy savings will take time to arrive, if they ever do.

But I wanted more exposure to the banking sector and dismissed these as short-term issues, soon to be forgotten. With luck, I’ll hold HSBC shares for decades. Its one-day dip gave me a chance to nab it at a 5% discount. All the growth and dividends I hope to generate should therefore start from a lower base.

I wouldn’t say it was a blinding bargain. The HSBC share price is still up 50% over the last year, and 190% over five. But with a forward price-to-earnings ratio of 11.2, I think it looks compelling value. And the dividend income looks tempting. The forecast yield is 4.6%. That’s forecast to hit 5.1% in 2027. And at some point, I’d expect those share buybacks to resume.

There could be more Gulf-related volatility, more shadow banking tremors. And if we get them, I know what I’ll do. I’ll buy more HSBC shares.

The post HSBC shares plunged 5% on Tuesday. Here’s what I did… appeared first on The Twelfth Magpie.

It continues to generate strong underlying profits and high returns, supported by rising revenue, firm net interest income and resilient capital strength.

So what sort of gains might we be looking at here?

What’s the share price potential?

Just because a stock’s price has risen substantially does not mean there is no value left in it. The reason is that the two measures mean different things.

Price is simply the number upon which buyers and sellers are happy to trade at any given moment. But value reflects the core fundamentals of the underlying business.

And, crucially for long-term investors’ profits, share prices tend to gravitate to their ‘fair value’ over the long run.

Discounted cash flow (DCF) analysis captures the logic behind this discrepancy. It pinpoints the fair value of any company by projecting future cash flows and discounting them back to the present. 

When those forecasts become less certain, investors demand higher returns, which increases the discount rate. DCF models vary according to the basic assumptions used by analysts. But based on my own 8.3% discount rate, HSBC looks 35% undervalued at its current £13.44 price.

That implies a fair value of £20.68 — significantly higher than today’s level. So, given the historical trend for stock prices to move to fair value, this could be a superb buying opportunity if those DCF assumptions hold.

Robust business momentum maintained?

HSBC’s latest results (Q1 2026, released on 5 May) showed total income up 6% year on year to $18.6bn (£13.8bn). The rise was driven by higher Wealth fees, stronger customer activity in Hong Kong and International Wealth and Premier Banking.

Meanwhile, net interest income increased 8% to $8.9bn, reflecting deposit growth and the benefit of reinvesting the structural hedge at higher yields. This is an interest‑rate portfolio that smooths earnings when rates move and continues to support income even as margins stabilise.

Profit before tax excluding notable items held stable at $10.1bn, underlining the bank’s ability to generate high earnings even through periods of macro uncertainty.

Together, these show a bank still producing high, stable profits with strong returns.

A risk is a rapid or deeper‑than‑expected global interest rate‑cut cycle that could squeeze margins faster than the hedge can effectively manage. Another is a downturn in global trade that might push credit impairments higher, so reducing profit stability.

Nevertheless, analysts forecast that HSBC’s earnings will increase by a strong annual average of 10.4% over the medium term.

My investment view

HSBC’s valuation still looks far too low for a bank producing this level of profit and return on equity.

The shares trade well below my estimate of fair value, despite stable earnings, strong capital strength and clear visibility on future returns.

For long‑term investors, that combination of resilience and undervaluation makes the stock look worthy of serious attention. And I, for one, will be buying more of the shares very soon.

I also have my eye on other deeply undervalued stocks in other sectors, several with much higher dividend yields too.

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Q1 results

Q1 earnings from the Asian-focused bank showed a mixed picture, with investors focusing more on rising risks than steady top-line growth.

Revenues rose around 6% year on year, supported by stronger performance in wealth management and higher net interest income. However, sentiment was weighed down by a notable increase in credit losses, which rose to $1.3bn, up $0.4bn from the same period last year.

This was partly driven by a fraud-related charge in UK corporate and institutional banking. In addition, a more cautious economic outlook reflected heightened geopolitical uncertainty and soaring oil prices.

Costs also increased, driven by inflationary pressures, higher performance-related pay, and continued investment in technology. Despite this, management reaffirmed its medium-term targets, including a return on tangible equity of 17% through to 2028.

So are investors reassured by the resilience in revenue or more concerned about the growing signs of credit stress?

What the sell-off is really telling investors

The sharp early sell-off reflects a shift in how investors are weighing growth against risk. Revenue growth and profitability remain broadly resilient, but rising credit losses have added to concerns that the economic backdrop is weakening faster than expected.

Expected credit losses are now higher, signalling potential stress building in lending portfolios at a time of already elevated global uncertainty.

Banks face particular pressure in this environment. Credit provisions act as a forward-looking measure of asset quality. So any increase tends to weigh on sentiment even when headline profits hold up.

Rising oil prices and escalating geopolitical tensions are adding to that pressure. They are fuelling concerns about persistent inflation and slower growth. This is raising fears of a return to a 1970s-style stagflationary environment. That backdrop increases the risk of further loan impairments.

Against this backdrop, investors are reassessing whether current earnings strength is sustainable or masks emerging weakness beneath the surface.

The result is a clear market tension: resilient near-term performance versus growing uncertainty about the outlook. That uncertainty is driving the move in early trading.

What’s the verdict?

Looking beyond near-term volatility, one of the more important signals in the results was the resilience in net interest margin. It was 1.6%, slightly lower than the previous quarter. However, it still points to a relatively supportive interest rate environment for lenders compared with the ultra-low rate era.

More broadly, persistently higher oil prices and sticky inflation make a return to near-zero interest rates unlikely. That is particularly true given already elevated levels of global debt.

This matters for long-term earnings power. A higher-rate environment supports structurally stronger net interest income, even if credit conditions fluctuate.

For long-term investors, the key question is whether short-term credit concerns are masking a more durable earnings opportunity in a higher-rate world. I think the combination of resilient margins and a structurally higher rate environment continues to support the long-term earnings case, despite near-term volatility.

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I won’t lie: I was pretty shocked by the decline, given the strength of some of the numbers.

Hargreaves Lansdown notes that the “first quarter was better than the headline numbers suggest,” adding that “revenue came in ahead of expectations once the noise from disposals is stripped out, helped by a strong showing in Wealth and solid fee income, while net interest income was broadly where the market expected.”

So why has the market sent HSBC’s share price lower? And is this an attractive dip-buying opportunity?

Crashed out

While revenues topped forecasts, HSBC was whacked by a couple of major problems in Q1:

• Rising operating expenses, which increased 8% year-on-year at constant currencies to $1.2bn.
• A whopping $1.3bn worth of credit impairments.

This meant that while revenue increased 6% to $18.6bn, pre-tax profit dipped 1% to $9.4bn.

The big story was that $1bn+ impairment charge, which was up $400m quarter on quarter and underlined the bank‘s vulnerability to the Middle East crisis. HSBC said $300m of the charge reflected “heightened uncertainty and a deterioration in the forward economic outlook” after the conflict started in February.

Investors also didn’t take kindly to a separate amount of $400m, a credit impairment related to a fraud case in the UK. HSBC didn’t specify the source, though the Financial Times attributed this to the collapse of Market Financial Solutions (MFS), which the bank had exposure to through its private credit operations.

On the cost front, HSBC said that “continued investment in our Wealth business, the phasing of the performance-related pay accrual… and the impacts of inflation” drove operating expenses above forecasts.

Have investors overreacted?

There could be more trouble in store as the Middle East crisis fuels inflation and hits economic growth. Investors should brace for more credit impairments and cost pressures.

Yet I can’t help but ask myself: is HSBC’s share price plunge today an overreaction? In my view, there was still a lot to really like about that Q1 statement.

Those better-than-expected revenues were helped by “strong growth in Wealth fees and other income in our International Wealth and Premier Banking and Hong Kong business segments.” The outlook across HSBC’s operations is robust as ever, as surging wealth levels across Asia drive customer activity.

What’s more, the bank hiked its net interest income (NII) forecasts thanks to the improved interest rate outlook. NII for 2026 is now expected at $46bn, up $1bn from previous forecasts.

Are HSBC shares a possible buy?

I hold HSBC stock in my portfolio. While the near-term risks might be rising, the long-term picture remains a compelling one. And following its share price plunge today, I think the FTSE 100 bank is worth serious consideration. Its shares trade on an attractive price-to-earnings (P/E) ratio of just 11 times.

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But here’s the thing: some top FTSE 100 shares offer a brilliant blend of growth, income, and value for money. Severn Trent (LSE:SVT), HSBC (LSE:HSBA) and Legal & General (LSE:LGEN) are three such stocks I’m considering for my own ISA and think others could too. Read on to find out more.

All-round value

Utilities stocks aren’t famed for their explosive growth potential. But Severn Trent provides this in spades, its long-term £15bn investment programme rapidly expanding its asset base and ability to raise profits.

Is this reflected in the company’s valuation? I think not — its forward price-to-earnings growth (PEG) ratio sits just inside value territory of 1 and below, at 0.9. City analysts expect earnings to surge 18% this financial year.

With Severn Trent’s dividend yield at 4.2% it offers plenty of bang for your buck, in my view.

What I also like is that the water supplier’s operations are highly defensive, providing strong earnings visibility. Remember that rising interest rates could push borrowing costs higher, though.

Another top bargain?

HSBC is enjoying brilliant momentum as its emerging markets rapidly grow. Analysts have been steadily raising their earnings and share price forecasts following the bank’s forecast-beating Q4 performance. I think this could continue.

Right now earnings are tipped to rise 12% in 2026. It reflects the strong performance of the bank’s ongoing restructuring programme, along with its huge structural opportunities in Asia. RBC analysts, for instance, note that “Asian wealth is a key growth area for HSBC which should continue to grow other income over the medium term.”

HSBC’s forward PEG ratio is also an ultra-low 0.4. And its dividend yield for 2026 is 4.6%, beating the 3% average for FTSE 100 stocks. Asia’s traditional banks like this are facing increasing competitive threats. Yet this remains a top blue-chip to consider.

FTSE-leading dividend yield

Legal & General is one of the FTSE 100’s best-priced dividend stocks, in my view. Its forward price-to-earnings (P/E) ratio is 8.7 times, while its PEG is 0.9. Meanwhile, the dividend yield for this year is the index’s highest, at 8.8%.

Low earnings multiples and sky-high yields are sometimes a red flag for investors. It can often be a sign of a company in difficulties, or that a dividend cut could be imminent. Is this a category Legal & General shares fall into?

I believe not. Firstly, the company is highly cash generative and has a large capital pile. Its Solvency II capital ratio remains an enormous 210%, underpinning current dividend projections. It also has significant growth levers to pull, as an ageing global population drives financial products demand.

Legal & General’s earnings are tipped to rise 10% in 2026. I’m optimistic about these forecasts, though the fallout of the Iran War creates some uncertainty.

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I’m building a portfolio of global stocks with both of these goals in mind. And I’m using a Stocks and Shares ISA and multiple SIPPs to get there, using the tax-free benefits to help me grow my wealth.

The question is, how much would you need in an ISA to replace your salary with the same income stream from dividend stocks? Let’s take a look.

Targeting passive income

For this example, we’ll use the figure cited by the Office for National Statistics (ONS). According to them, the average British salary is £35,828.

You may be earning more or less than this. But it gives us a good ballpark figure to aim for.

So how large will someone’s nest egg need to be to replace this wage with dividend shares? It all depends on the dividend yield your portfolio generates. The greater the yield, the smaller your ISA needs to be, as shown here:

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.

Building ISA wealth!

The advantages of holding greater-yielding dividend shares are obvious. But this comes with added risk, as sky-high yields can be unsustainable over time. They can also indicate a struggling company whose sinking share price has inflated the yield.

A strong strategy that balances risk and reward, then, could be to target an average 7% yield with a range of moderate-to-high-paying businesses. For that, you would need an ISA worth £511,829.

That’s a large chunk of cash. But by investing little and often in FTSE 100 shares, it’s a very realistic target. Take the following five blue-chip stocks, which have delivered an average annual return of 17.3% over the last five years:

What if an investor put £200 monthly across these FTSE 100 companies today? If they can repeat their performances of the last decade, the investor would reach that rough £512k target in just over 21 years.

This ‘mini portfolio’ offers a blend of top growth, value, and dividend shares, offering resilience over the long term. Not all Footsie-listed stocks have delivered these sort of stunning returns, of course. But my example illustrates the potential returns on offer from the UK stock market.

A top FTSE stock

HSBC is a share I think could keep delivering double-digit returns each year. Why? It offers a brilliant blend of growth and dividend potential, underpinned by its rising focus on emerging markets.

The FTSE bank is selling assets in mature regions to prioritise on its Asian markets. The reason is obvious — the combination of rising personal wealth and population levels could lift cash flows and profits through the roof. HSBC has the brand power to continue seizing this opportunity, along with a robust balance sheet to fund product and regional expansion.

The Iran war could impact HSBC’s earnings in 2026 as Asia’s economies are hit. But the long-term picture is as robust as ever, with the region’s retail banking sector expected to grow roughly 7% each year by 2035.

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