I find it amazing that a few hundred pounds per month can build into a seven-figure portfolio. And by investing in dividend stocks at regular intervals — known as pound cost averaging — I can reduce the stress associated with an ever-fluctuating market.
Here, I’ll show how £500 per month can turn into £1m inside a Stocks and Shares ISA.
Boring but beautiful
One of my favourite dividend stocks in my portfolio is Legal & General (LSE: LGEN).
Admittedly, insurance and asset management aren’t the sexiest areas. But I don’t want them to be. I just need the FTSE 100 company to get on with the humdrum work of quantifying risk and making sound investments.
If it does that well, which it has for many decades, then dividends will flow. Right now, the forecast yield for FY24 stands at an incredible 9.6%.
This means I could expect to receive £9.60 back each year from every £100 I invest!
Moreover, the stock is trading on a cheap forward-looking price-to-earnings (P/E) multiple of 9.5. So there could also be share price gains in future.
That’s not guaranteed though and neither are dividends. Meanwhile, a global recession would likely reduce demand for its financial services and impact the value of its assets under management.
Plus, I should mention that Legal & General shares haven’t really gone anywhere for years. Yet this doesn’t worry me too much given the ultra-high dividend yield on offer.
The company has a really strong balance sheet and competitive position in its UK markets. It generated surplus cash of £731m in its latest first-half period (easily enough to cover the dividend).
Long-term mindset
Let’s assume I invest £500 a month in dividend stocks like this and achieve a 9% average return over the long run. In this case, I’d end up with a portfolio worth £1m in just under 32 years.
Mind you, this figure excludes any platform or trading fees along the way. And it assumes I keep the dividends in my portfolio rather spend them.
Essentially, this strategy involves adopting a long-term mindset to wealth-building rather than using dividends as passive income to fund my lifestyle.
Stay invested
Finally, a stock market crash is sometimes referred to as a “black” day (Black Thursday in 1929, Black Monday in 1987, etc.). However, I’d learn to view them more like Black Friday, when everything goes on sale and I can do some shopping.
Investing through downturns can boost long-term returns significantly.
Of course, it would be great to know in advance when a big fall was coming. But markets are unpredictable, meaning even well-informed experts struggle to consistently forecast movements (despite being paid handsomely to do so).
Take the last few days, for example. We had the worst start to an August for many years and this triggered fears about a stock market crash. Then on 8 August, Wall Street enjoyed its best day in nearly two years, clawing back most of the losses from the week before.
This shows why trying to time the market is a fool’s errand (and not the good kind of Fool!).
History demonstrates that investors who buy shares of high-quality companies can build wealth. And those who do so persistently, without trading in and out of the market, will do even better.
