Trying to make a million by investing in the stock market isn’t an unrealistic prospect. Indeed, according to my numbers, you can achieve this goal by putting away just a few hundred pounds a month, and letting the power of compounding work its magic.
Today I’m looking at two FTSE 100 income giants to help you make a million the slow and steady way.
Rio Tinto (LSE: RIO) might not be the most exciting company in the FTSE 100, but I think this mining giant can help you get rich slowly.
Over the past few years, management has cut costs to the bone and any additional cash generated from operations is now being returned to investors, rather than reinvested in wasteful mining projects.
The strategy has helped Rio rise to become one of the UK’s leading dividend stocks. Analysts believe the shares will yield 4.9% in 2019, although this forecast is based on historical iron ore prices. In recent weeks, the price of iron ore has spiked. If it remains elevated for the rest of the year, I wouldn’t rule out a better than expected full-year income distribution.
Another reason why I think this is the perfect investment to help you make a million is the fact that the price of Rio’s main product, iron ore, is protected from inflation because its price should increase over time (historically commodities have generally been a good hedge against inflation). This implies the company’s dividend yield should continue to grow steadily over the long term, giving a predictable income to help you on your way to a million.
Because you will need to save and invest for several decades if you want to hit that target, it’s vital to include companies in your portfolio that will be around for the next 30 years, or more. That’s why my second target is BAE Systems (LSE: BA).
The defence market is highly regulated and just a few large companies dominate the industry. Governments need these companies to survive because defence contracts can last for decades, and policymakers need to be sure that companies can survive long enough to make good on their obligations. These contracts also guarantee a steady income stream for investors because managers know roughly how much money they should be receiving every year, and can, therefore, set dividends accordingly.
What’s more, the defence market is relatively immune to economic cycles, so you should continue to receive an income from BAE no matter what happens to the UK after Brexit.
After recent declines, shares in BAE now support a dividend yield of 4.5%, and the payout is covered twice by earnings per share. The stock is changing hands at 11.2 times forward earnings at the time of writing. I don’t think that’s too expensive for a defensive company with a predictable long-term outlook and attractive dividend credentials.
Making a million
When combined, my figures show that these two trusty dividend stocks can help you make a million.
An average dividend of 4.7% coupled with a potential annual capital gain of around 3% per annum (in line with inflation) would give a total annualised return of 7.7% from the Rio/BAE portfolio. At this rate of return, you would need to invest £320 a month to make a million over the space of four decades.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.