In times of economic uncertainty, the idea that people earning an average wage can become millionaires from memorising a few simple words sounds implausible. Think again. As long as you’re disciplined, building a massive pot of money over time is achievable. Here’s how.
‘Receive’
To reach your financial goals, you’ll need a bit of help from dividends. Think of these initially modest biannual or quarterly payouts as the fertiliser needed to grow your wealth over the long term.
It follows that the first part of this strategy involves buying shares in a group of companies offering dependable but also realistic yields. Diversification is hugely important. Purchasing shares in several of the UK’s biggest housebuilders, for example, isn’t particularly prudent. Adding just one is far more sensible as other, less cyclical, companies in your portfolio (such as power provider, National Grid, or pharmaceutical behemoth, GlaxoSmithKline) should ensure that your wealth doesn’t suffer too much in the event of a property downturn.
In addition to being diversified, you should also check how safe the yields on offer really are by looking at the number of times a company is capable of paying its dividend from profits. A ‘dividend cover’ of 2 or more indicates the payout is secure. Anything approaching 1 may signal that a business is in trouble. Packaging producer, Mondi and communications giant, BT are just two examples of businesses that appear capable of paying dividends for the foreseeable future.
‘Reinvest’
In periods of market volatility, dividends are one of the few things to raise shareholders’ spirits. However, to build a solid financial future, that money can’t stay in your possession for too long. Ideally, it should go straight back into the stock market, perhaps to the same company or another business that you believe shows promise. While some investors choose to automate this process, others may see this as an opportunity to re-evaluate their holdings, particularly if one or two shares have performed so well that they now take up a greater proportion of the portfolio than initially desired.
Above all, the point here is to resist the temptation to spend what you earn. Let the power of compound interest really get to work.
‘Repeat’
Throwing money back into the best businesses on the market makes a lot of sense. The only caveat to this is that it needs to be done regularly and with almost religious zeal. Leaving cash to languish in your stocks and shares ISA will severely weaken your returns over the long term.
To reach millionaire status, the process of receiving and reinvesting dividend payments must also be repeated over decades. As such, only patient investors need apply.
‘Relax’
Counter-intuitively, the fourth step is possibly the hardest to master. Once you’ve started to receive and reinvest dividends on a consistent basis, you need to avoid meddling with your portfolio. Given the barrage of negative news coverage daily, this is easier said than done.
As investing is one of the few things in life in which doing as little as possible improves performance, you’re likely to do far better by only checking your portfolio periodically. By not attempting to time the market or jump from share to share, you’ll save yourself a lot of unnecessary stress (not to mention broker fees).