With the interest rates from most cash savings accounts on the floor, hoarding money in cash looks risky to me. Indeed, the real value (spending power) of my savings will likely fall behind general price inflation over time. And that’s the opposite outcome from what’s needed to build wealth. Instead, it’s time for me to start investing in stocks.
Why I think it’s a great time to start investing in stocks
So, these days, I’m investing more money in the stock market than ever before. And one quick guide to the attractions of stocks can be found in the dividends many companies pay. By holding shares, I get regular payments. Or, by investing in managed and tracker funds, I get a payment reflecting the aggregate dividends of all the shares in the fund.
And around their current share prices, some great companies have dividend yields above 5%. I’m thinking of names such as SSE, GlaxoSmithKline, British American Tobacco and National Grid. And there are also some attractive businesses with dividend yields at 3%, or above, such as Unilever, Smurfit Kappa, Nichols, Britvic and AG Barr. Indeed, dividend income is a tangible and bankable return we can’t argue with. But it’s not the only way shares can reward investors.
Another way is for the underlying business to reinvest some or all of its cash inflows back into operations. And, if it does that, it’ll likely be financing the expansion of the enterprise and building real value in the business. Meanwhile, over time, the share price will likely rise to recognise the increase in value. And a rising share price delivers further returns for shareholders as the value of the invested money increases.
So, that’s two ways my investments can deliver me a return – via dividend income and via capital appreciation. And I can enhance my returns further by remaining invested and by ploughing my dividend income back in as well. Both methods will help returns to compound. And the process of compounding is key to building wealth. Indeed, compounding my gains is a third way to generate escalating returns from shares.
But how long will it take to compound £100 a week into a million? Of course, that depends on the annualised rate of return achieved. But, historically, the general stock market has delivered a figure of around 7%. If I invest £100 a week and compound an annualised return of 7%, the online calculator tells me it would take 39 years to generate a pot worth £1m.
However, many investors target higher annualised gains by carefully picking stocks and learning about investment strategy. If I can manage to achieve an annualised return of 15%, it will take me 24 years to build my investments up to £1m from a starting balance of zero. And I believe that’s a realistic goal.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended AG Barr, Britvic, GlaxoSmithKline, Nichols, and Unilever. 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.