Most people invest in the stock market to build wealth in the pursuit of financial freedom. After all, who doesn’t love the idea of quitting their nine-to-five and still making money from dividends without having to lift a finger?
To many, this goal may seem like nothing more than a fantasy. But as it turns out, it’s far more achievable than what most people might think.
Setting targets
The first step is to work out how much money is actually needed to live off of dividends. And this ultimately depends on the type of lifestyle someone wants to have. An individual happy with living in more moderate means may only need to generate £30,000 a year. On the other hand, someone keen to enjoy fancy holidays and excursions might need closer to £50,000.
On average, UK stocks typically pay out a 4% dividend yield. And at this rate, investors will require a portfolio worth somewhere between £750,000 and £1,250,000 to hit the previous targets. Neither’s exactly pocket change. But by starting the wealth-building process as early as possible, both are obtainable when leveraging long-term compounding.
By focusing on growth initially and then transitioning to dividends later, investors could expect to earn close to a 10% average a year with an S&P 500 index fund. And with this approach, the journey could start approaching its destination in just over 25 years.
| Portfolio Milestone | Time Required | Dividend Income Potential |
| £500,000 | 23 Years | £20,000 |
| £750,000 | 26 Years | £30,000 |
| £1,000,000 | 29 Years | £40,000 |
| £1,250,000 | 31 Years | £50,000 |
| £1,500,000 | 33 Years | £60,000 |
Speeding up wealth creation
Rather than relying on index funds, investors can take control and invest directly in only the best businesses. This approach comes with increased risk and the need for strong emotional discipline, especially during volatile markets.
But it also opens the door to discovering amazing market-beating opportunities, such as Tractor Supply Co (NASDAQ:TSCO).
Today, the company is the largest rural lifestyle retailer in the US, focusing on products like pet food, livestock feed, fencing, tools, and outdoor equipment. That certainly doesn’t sound like a high-growth enterprise compared to some of the tech giants out there.
But over the last 20 years, this retail enterprise has expanded its operations so much that shareholders have earned a 2,791% total return. That’s an average of 18.3% a year. And it’s enough to cut the time needed to grow a £1.5m portfolio from 33 years to just over two decades.
Still worth considering?
At a market-cap of $30bn, it’s unlikely Tractor Supply will deliver another 28x return by 2045. But the company’s growth is far from over. Demand remains high with new stores being opened across the US, with customer spending proving resilient to economic wobbles.
Encroachment from the likes of Walmart and Amazon does present a notable competitive threat. And cost inflation in its supply chain undoubtedly introduces some operational headaches that could squeeze gross margins.
But with an impressive track record, Tractor Supply could still be worth a closer look for investors looking to compound their way towards financial freedom in the stock market.
