The Motley Fool

Forget the lottery and Bitcoin. Dividend shares could help you make a million

The prospect of doubling your money on Bitcoin or winning a million on the lottery is likely to appeal to most people. However, the risks involved in both pursuits are relatively high, and could mean that many people lose money overall in the long run.

By contrast, investing in dividend shares could be a better idea. Certainly, they may face a challenging 2020 due to risks in the global economy. But their track record of growth shows that now may be the right time to capitalise on low valuations and higher yields. It could improve your chances of making a million.

Risk/reward

Although the potential rewards of the lottery and Bitcoin are high, their risks are also significant. In the case of the lottery, for example, the vast majority of players will not win at all. A small number may win modest amounts of money, while only a tiny proportion of players will win large amounts.

Bitcoin, meanwhile, may have doubled since the start of the year. However, its limited size and lack of infrastructure may mean that its long-term future is highly uncertain. It may ultimately be unable to replace traditional currencies, which could lead to disappointment for many holders of the virtual currency. And with there being no means to understand what it is worth due to its lack of fundamentals, investors are buying an asset when they do not know whether it is cheap or expensive. This significantly increases its overall risk.

Dividend shares, meanwhile, have historically offered high total returns over a sustained period. A large proportion of the total returns of major indices have been derived from the reinvestment of dividends. Therefore, buying and holding dividend shares could be a sound means of generating impressive returns on a relatively consistent basis. With the impact of compounding, the long-term returns from income shares could prove to be highly attractive.

Investing today

As such, buying a range of dividend shares could be a sound move. It is possible to reduce overall risk through buying those companies which have strong fundamentals. For example, a business that has a solid balance sheet and a low dividend payout ratio may be lower risk than a stock that is struggling to meet its dividend payments. This could lead to fewer losses for an investor, which ultimately improves their returns.

As mentioned, a number of dividend shares appear to trade on low valuations. Risks such as the global trade war and political uncertainty in the US and China mean that investors have adopted a cautious stance in recent months. This could provide a buying opportunity. As a result, using your spare change or risk capital that would have been allocated to the lottery or Bitcoin may be better spent on building a portfolio of dividend shares. They could improve your chances of making a million in the long run.

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