Imagine if we could walk down the high street or drive through an industrial estate, looking at successful and massively profitable businesses, knowing that you owned part of them. The thing is, we can! All the companies in the FTSE 100 index of leading shares on the London market are traded by the investing public.
In fact, I think steady investment over time in carefully chosen FTSE100 companies could help me build serious wealth over the long term. Here’s how.
Tried and tested
First, I ought to explain why I am focusing here on the FTSE 100. After all, many of the country’s largest companies are long-established businesses in mature industries. They may lack the racy growth prospects of smaller, newer firms in the FTSE 250 or the US Nasdaq.
But what they do have is scale. In itself that is not an indication of profitability in the past, or indeed in the future. But overall, the FTSE 100 is a collection of many large, proven businesses with sizable income streams I think could endure.
Finding shares to buy
Still, I would not ‘buy the index’ by investing in a tracker fund. Instead, I would be looking to choose – carefully – individual shares I felt had real long-term promise.
To do that, I would ask myself three key questions. How profitable is the business model likely to be? What might change that in the future? And how attractive is the valuation now?
A real world example
To illustrate this, consider a company whose products you may well have used over the past few days whether you realised it or not: Unilever (LSE: ULVR). In fact, the company’s products are used several billion times a day around the globe.
The company operates in markets I expect to benefit from long-term demand, such as shampoo and bodycare.
Selling soap bars might not sound like great business as the barriers to entry are low, after all. However, that is where the company’s investment over many decades in building iconic brands like Marmite and Dove pays off.
Having unique brands, proprietary technology and unique product formulations can help the company to differentiate itself from rivals. That gives it pricing power, in turn enabling it to make sizeable profits and fund a quarterly dividend.
However, that formula can go awry. A risk I see at the moment is that a weakening economy may lead shoppers to plump for supermarkets’ own brands.
But as a long-term investor, I consider Unilever as a solid business with strong future dividend potential. If I had spare cash I would happily buy it for the long term.
Building wealth over time
By building a diversified portfolio of high-quality FTSE 100 shares at attractive valuations, I think I could build wealth.
Imagine I did that with £89 each week and was able to generate a compound annual growth rate of 10% (from a combination of share price growth and reinvesting dividends). That is not guaranteed, of course, but it is possible. After 30 years, I could have a portfolio worth over three quarters of a million pounds!
This post was originally published on Motley Fool
