Is it possible to invest in shares and double, triple, or even quintuple my money? I think it is – although the timeline involved may be decades. Here is how I would approach investing in UK dividend shares with the objective of turning £20,000 into £100,000.
Take the long view
Dividend shares are popular with some investors because of the potential passive income streams they offer. Indeed, such income opportunities form the main element of my plan. But I think it is also worth mentioning that some dividend shares could show substantial capital gain over time too.
To pay dividends, a company needs to make money. If it does that with a proven business model that has limited growth prospects, there may be no particular reason for the share price to keep growing dramatically over the years. That is how I see my investment in tobacco-maker Imperial Brands. I like the high dividends, but am not expecting much long-term capital growth from a mature cigarette business.
But some companies keep growing their dividends because their businesses keep expanding. Drinks maker Diageo is an example. Its record of annual increases for over three decades means it is a dividend aristocrat. The company’s profit growth continues to be impressive. That could help the share price improve over the years.
Either way, by taking a long-term view, I can aim to grow the value of my portfolio, whether through dividends or a combination of dividends and share price increases.
The miracle of compounding
If I invest in UK dividend shares that are growing their payouts, over time I will hopefully see the value of my portfolio increase faster each year without needing to top up my initial investment.
But how could I try to get to £100,000 by investing an initial £20,000? One way is the miracle of compound returns, which basically means reinvesting the dividends. Over time, as the dividends themselves start to earn me dividends, my portfolio ought to grow quicker.
As an example, if my portfolio yielded an average 8% per year in dividends, £20,000 would become £100,000 in just 21 years. That example assumes constant dividends and share prices, but the principle is clear. Reinvesting dividends can quickly add up.
Buying quality UK dividend shares
The higher the yield, the faster I could reach my target. For example, if my average yield was 4% not 8%, I could still get to £100,000. But it would take more than four decades.
But buying shares just for their yield can be a value trap. Instead, I would try to find quality UK dividend shares with resilient business models that have long-term profit potential. I would not sacrifice business quality simply for higher yield. If the business cannot keep producing the right level of profits, after all, it may cut its dividend.
That does not mean I would not hunt for bargains though. Even great companies see their share prices move around. If I buy into a company like Diageo when its share price has fallen, I can get a higher yield than buying it when it is high. That is why I keep a list of UK dividend shares on hand that I would like to buy the next time their price looks attractive.