All investors want to make as big a return as they can from the stock market. Alongside time in the market and costs incurred, the percentage return achieved is one of the biggest contributors to growing your money. If you want to generate wealth through the stock market, you need to improve your performance and your returns. I’m aiming to make returns of 25% a year from income and growth shares.
Pick quality income and growth shares
To have any chance of reaching the ambitious target of 25% annual growth, I’ll need to pick quality shares. I think one way to do this is to look at shares that currently combine both income and growth. I’ll want to see that a company has a history of being able to consistently increase dividend payouts to investors while growing the share price.
One way to assess a company’s performance is by looking at its earnings per share growth. That alone won’t be enough though. To get a more full picture of a company, I’ll want to see high and consistent levels of return on capital employed, high if not growing profit margins, and some sort of competitive advantage or unique selling proposition.
Past performance is also an indicator, although, of course, I want to be optimistic and confident about the future prospects for any investment. Company management that has made consistently smart decisions in the past could well be able to keep doing so. That gives them a better chance of delivering value for shareholders. Simon Wolfson at Next seems to be a great example of this kind of director.
Think long term
To make returns of 25% a year, I want to be entirely focused on pursuing my income and growth strategy. This means thinking long term while ignoring most short-term opportunities and volatile shares. I want to avoid being drawn into overtrading and racking up big costs. Instead, I want to focus on building a portfolio of quality income and growth shares that I’m confident holding.
Mostly concentrate on active investing and ignore ETFs
To outperform the market I’ll mostly ignore trackers, unless they give me access to a market, commodity, or theme that I particularly want to have exposure to. To reach my goal, though, I will require very active investment. I will need to make sure my portfolio is consistently performing and that I’m generating new ideas and opportunities. I can’t expect – and no investor can expect – to achieve 25% returns by sitting back and letting a tracker do that work. It’s just not possible.
Even if I end up not making returns of 25% a year – which is ambitious – if I can get close by setting myself the goa,l then I’ll be able to retire early. That for me is the biggest goal and beating the market is the way to do it.
Andy Ross 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.