Any particular share can double your money, but the question needs to be followed by a couple of others, specifically – how long might it take and how risky is it likely to be?
Most investors looking for the next doubler or multibagger will think of the kinds of hot growth stocks like ASOS and Purplebricks, whose share prices soared over very short timescales (but, sadly, went on to crash over short timescales too).
Those chasing such stocks rarely do well long-term, and though they might have a few big successes, I’ve heard of too many who went on to lose a packet backing the wrong growth prospect at the wrong time.
Time is what counts
No, I reckon by far the best way to double your money and much more is to invest in dividend-paying stocks for the long term, and reinvest your dividend cash. So how long might it take for an investment in HSBC Holdings (LSE: HSBC) to double your money?
While the bank has had a few tough years for earnings, it’s kept its dividends stable, and a couple of years of recovery make me think the likelihood of a cut is receding. Forecasts put the dividend yield for the year to December 2019 at 6.6% (which, incidentally, is way better than anything you’d get from a Cash ISA).
Suppose you buy some HSBC shares today, and reinvest your 6.6% dividends in new shares (and reinvesting is especially easy as HSBC offers a scrip dividend, so you won’t even have to pay any broker charges). Would you be surprised to learn that you’d double your money in just 11 years, from dividends alone, even if the share price doesn’t move?
And if you’re starting out early in your investing career and have, say, 40 years ahead of you before you retire, every £1,000 you invested today at a 6.6% return would, under the same reinvesting strategy, grow to £12,890. Again, that’s even if the HSBC share price didn’t move by even a penny for the full 40 years, and the dividend was never raised.
Let’s be realistic and assume that, as top-quality shares have pretty much always done for a century and more, HSBC shares actually rise in price gradually. I do think that is likely, as the shares are on what looks to me like a very modest valuation right now, with forward price-to-earnings multiples of only around 10.6. That’s significantly below the FTSE 100‘s long-term average of about 14, and HSBC is paying better dividends than the index average too.
So let’s imagine the HSBC share price rises by a modest 2% per year over the long-term, and grows its dividend by the same proportion (which I think is a very conservative estimate). That total 8.6% annual return would result in a doubling of your money in a little under nine years.
And a 40-year timescale would see £1,000 grow into £27,100 – the extra 2% share price growth would more than double your eventual pot over that timescale.
What about 4% share price growth per year? That would lead to a doubling in seven years, and a 40-year pot of £56,200. Still looking for that next hot growth stock?
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended HSBC Holdings. 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.