You can get lucky and pick a huge winner, or you can use this time-tested investing strategy.
Sure, there are some people who have become rich finding shares like Capita Group (LSE: CPI) or Soco International (LSE: SIA) when they were tiny companies, then staying with them until their market cap is well over £1 billion.
Others have become wealthy using CFDs and spread-betting, still others by discovering high-momentum growth shares like Autonomy (LSE: AU) or ICAP (LSE: IAP) before other investors caught on.
But these complicated, labour-intensive tactics are ones that many investors don't have enough time to master.
I'd like to share with you a simple, easy strategy for becoming wealthy -- and then give you share ideas based on it. Although it's simple, it takes discipline to adhere to the rules. But if you follow this advice, you'll be well on your way to a million-pound portfolio.
Keep It Simple
One of the biggest mistakes investors make is complicating the process. Academics have proven that more information doesn't necessarily lead to better decisions -- but it does lead to overconfidence. Even worse, the more time and effort you put into researching, analysing, and deciding whether to buy a share, the more likely you are to buy it -- even if it's a horrible company after all.
Overconfidence and overcommitment are counterproductive in investing -- and it's why keeping your investment criteria simple and easy can help you avoid falling into these traps.
What sort of criteria am I suggesting? Just two steps:
1. Find strong, long-term dividend-paying companies
Dividends are the surest gains you can find in any market environment. As Bloomberg recently reported, even though the 10-year trailing return of the Dow Jones Industrial Average was negative as at 30 September, when you factored in dividends, the return was actually a positive 18%. It's a similar story for the UK market too.
It's best to look for companies with a long history of paying out dividends, and a long history of not cutting dividends. That would mean avoiding companies like BT Group (LSE: BT-A) and even banks like HSBC (LSE: HSBA) and Barclays (LSE: BARC), for example.
You should find companies with predictable, sufficient free cash flow, so you can be reasonably sure these dividends will continue to be paid.
And now for the hard part...
2. Hold forever
The strongest of dividend-paying companies raise their dividend over time. So when you hold one for long enough, you eventually reach a point where you are making more money annually in dividends than you initially invested in the company.
This is hastened when you reinvest your dividends back into the company, with each dividend purchasing even more shares of the company, meaning even more payout at the next interim or final dividend.
So long as the business continues to perform, and the company continues to maintain or raise its payouts, the simplest and oftentimes most lucrative approach is to remain an owner and collect your dividends.
Implementing This Strategy
The FTSE 100 has many steady, large, dividend-paying companies. For example…
We've seen more than a fair share of dividend blowups over the past year, but if you look for a company with enduring demand, and sufficient free cash flow -- you are following the easiest way to become a millionaire.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who doesn't have an interest in any of the companies mentioned in this article.
