Income stocks are well represented in my portfolio. I seek the safety and reliability of established value stocks paying dividends, rather than investing in high-risk growth.
But, as a private investor with limited funds, is it possible to reach millionaire status by investing in dividend-paying value stocks? Let’s take a closer look at my strategy.
Compound returns
Firstly, I invest for the long term. And this allows me to use a strategy called compound returns. Essentially it’s the process of reinvesting dividends and earning interest on my interest. The longer I leave it, the more money I earn.
So if I invested £10,000 in income stocks paying 5% yields, after 10 years of reinvesting my dividends I’d have £16,000, without taking into account share price growth. But after 30 years, I’d have $44,000, again without taking into account share price growth.
However, I can also increase my returns by investing regularly.
So if I were to add £500 a month, and increase my annual deposit by 5% a year to reflect inflation or changes in my salary, after 10 years of compound returns I’d have accrued £112,000.
But after 30 years, I’d have a huge £815,000. And that’s without taking into account share price gains. It’s worth remembering that the FTSE 100 is approximately four times larger today than it was 30 years ago. That would get me closer to my million target, although I have to be aware that I could lose money as well as making it as returns aren’t guaranteed..
Picking wisely
Legendary US investor Warren Buffett tells us to invest in a handful of stocks that we truly believe in, rather than spreading our bets wide.
This is because it can be hard to truly assess the value of a firm when we don’t really understand what it does or the industry in which it operates.
So what sort of things should I be looking out for?
Well, Buffett always searches for a margin of safety. This means he wants the valuation of a company to be discounted against his perceived intrinsic value. If it doesn’t reflect the discount he’s searching for, he won’t buy it.
There are several ways of valuing a company and one of the best is the discounted cash flow model. It can be tricky, but there are online calculators to help me with it.
So, basically, I need to calculate what I think a stock is worth, and then see if it’s discounted.
Why I’d start now
Investing regularly helps iron out the peaks and troughs of investing. But if I had capital ready to invest now, I would.
And that’s because many stocks are currently trading at discounts versus where they were a year ago. And this provides me with the opportunity to boost my gains as the market recovers. It could also drastically reduce the waiting time in my quest to get rich.
