The idea of putting money into something today and receiving payments regularly for decades to come as a result is already appealing to me. But not only that, as well as the payments, my initial investment could grow in value too! That is the basic reasoning behind investing in dividend shares.
In reality, things can be more complicated.
Nothing is ever guaranteed: share prices can fall and dividends may be cancelled. Over the long run, many companies go out of business. Yet some publicly listed firms really have paid dividends to their shareholders year after year — for many decades.
Aiming for a million!
From Shell to Scottish Mortgage and Spirax-Sarco to City of London Investment Trust, the stock market today offers me the chance to buy into a variety of shares that have been paying dividends for over half a century.
Indeed, of those four, only one (Shell) has cut its dividend at any point in the past half century!
By taking a long-term approach to investing, I think I could realistically aim to build a portfolio worth a million pounds simply by drip feeding money each month into carefully selected dividend shares.
Here is how I would go about that, with a spare £500 each month.
Compounding quality
My long-term results will be a result of two factors. One is how much I put in: in this example, £500 each month adds up to £6,000 per year.
The second factor is the compound annual growth rate of my portfolio. If that is 5%, for example, I would hopefully become a stock market millionaire after 46 years. But if I can achieve a compound annual growth rate of 12%, I ought to hit my target in 27 years. After 46 years at that rate, my portfolio would be worth over £9m!
Compound annual growth rate is driven by the share price growth (or fall) of my holdings and dividends I earn. I can improve my compound annual growth rate by reinvesting dividends (something also known as compounding) rather than withdrawing them from my ISA as cash.
But ultimately the key determinant of how I do will be whether I invest in quality companies at the right share price.
I aim to ‘compound quality’ by letting the long-term business prospects of a company get better and better, hopefully leading to both an improving share price and growing dividends.
How I’d start
Rather than fixating on a particular target compound annual growth rate, then, I would start my monthly purchase of dividend shares by asking one simple question.
What companies do I think have outstanding prospects that are far from fully reflected in their current share price?
The question is simple – but finding the right answer may not be! But by searching for dividend shares for my portfolio that meet that description, I could get highly rewarding results.
Right now, I believe there are some such shares for sale in the stock market. I am taking effort to find them!
