Do you have a favourite share? Perhaps a daring growth company that offered promise and went on to exceed every expectation? I’ll bet you want to find another share just like it.
Part of the thrill of investing, of course, is the potential of life-changing returns.
Those kind of opportunities don’t come around often, but then again, they don’t need to. If you invest in just a few companies which perform tremendously well, then their gains will eradicate the losses caused by a myriad of poor investment choices, with plenty more upside to spare.
So how do you set about finding multi-bagging growth opportunities — the type of shares which will bring you one step closer to retirement?
Here’s a thought
Read. Read everything you can. You could scan through technology periodicals to glean clues on what might be the next booming industry. But that alone — the idea you come up with — isn’t enough.
What are you going to do with your idea?
More important than the idea itself is your behaviour as an investor.
Will you sell if the shares fall by a third — even if the value of the business hasn’t actually changed?
A first-rate business becomes more valuable over a period of time measured in years and decades — forget year-to-date performance. If you understand this, and increase your holding period accordingly, then eventually you’ll share in the enormous wealth created.
The power of dividends
It really isn’t that complicated. To use an example, let’s look at Unilever (LSE: ULVR) (NYSE: UL.US), the consumer goods giant.
Since the start of the millennium Unilever is up 170%, or a whopping 350% if dividends — which advanced from 21p per share to 91p during the period — were reinvested.
That means a £100,000 investment made in January 2000 would now be worth £450,000, with dividends alone accounting for £270,000 of that total.
Consider that even though there were two brutal bear markets along the way, all it took was a basic strategy — buy, hold, reinvest dividend, repeat — to produce a fourfold return.
Growing your fortune
What’s the secret of Unilever’s success? Some two billion customers in 190 countries use one of Unilever’s brands — such as Dove, Lipton, Hellmann’s and Surf — every day.
Over the last five years, Unilever generated €18.7bn in free cash flow. So long as Unilever’s brands stay front of mind, people will keep stocking their cupboards, and cash flow should continue to grow.
Unilever’s dividend yield (3.3%) isn’t the highest around. But more than half of sales are in emerging markets, where consumer spending power is set to rise in the coming years.
Investors will hope that Unilever converts sales growth in countries such as Brazil, India and China into free cash flow growth, supporting future dividend increases.