A lot of people dream of becoming a millionaire. Why not take action and try to turn that dream into a reality? One way I would aim to do that is by building a portfolio of FTSE shares that pay dividends. The plan may take decades to reach my target – but I think it might get there if I am patient.
The miracle of compounding
As an investor, I have a choice of investing in growth or income shares. I could focus on one kind, or split my portfolio across the two types. In this plan, I will invest the money in income shares. That is because I want to reinvest the dividends in more shares that can hopefully then start earning dividends themselves. This is what is known as compounding.
If I put £1,000 a month into shares and compound the dividends, I should be able to grow my investment funds quicker than if I take the dividends out as cash.
An example of getting to a million
In fact, if I earn an average annual dividend yield of 9% and keep compounding it, I would get to my million pound target in under 24 years. That is not fast but I think it is not too slow given the scale of the challenge. Even at the age of 40, starting this plan could make me a millionaire before I hit retirement age. If I began in my mid thirties, I could be a millionaire before I turned 55!
The devil is in the detail, though. In this example, I presume that share prices and dividends remain constant over the time I am investing. In reality, they could go down. Then again, they may go up, bringing my goal within reach even sooner.
A 9% yield is also pretty high compared to what most UK stocks pay. That said, there are a few FTSE 100 shares currently yielding 9% or more, including Antofagasta, Persimmon and Rio Tinto. FTSE 250 shares with a yield over 9% include Direct Line, Diversified Energy, Ferrexpo, Jupiter and Provident Financial.
Finding FTSE shares to buy
But high rewards can come with high risks, as that list of shares demonstrates. Ferrexpo’s main business is located in Ukraine. Antofagasta faces falling prices for its main product, copper. Jupiter has seen investors pulling money from its funds.
That is why I would not just focus on yield and risk buying shares that turn out to be a value trap. Instead, I would look for companies I felt had strong business prospects and were trading at an attractive price. Some of the companies above would meet those criteria in my view. For example, I think Direct Line has a good business thanks to its strong brand and resilient demand for insurance. There is a risk that price inflation for used cars will push up costs and eat into profits. But I would happily own it in my portfolio.
Indices like the FTSE 100 contain some of the country’s largest businesses. If I focus on finding quality shares at the right price and stay the course in coming decades, I could hopefully aim to become a millionaire.