Some of the biggest and most successful businesses in the country help make up the FTSE 100 index of shares.
By investing in them, even with relatively modest means at my disposal, I believe I could build long-term wealth. Here is how I would aim to do that using £83 each week.
The approach I’d take
Owning shares can create wealth in two ways, a price growth or cash payments known as dividends. Some shares may end up offering me both. Others may offer me one while, alas, some shares offer me neither.
Dividends are never guaranteed. As for share price change, nobody knows what the future holds, no matter how confident they may be that their assessment is well-founded.
Still, while there are no guarantees, dividends can be substantial. FTSE 100 firms paid over £80bn in dividends last year.
Simply by owning such shares I would be in line for dividends they pay. And as even the best-run business can run into unforeseen difficulty, I would spread my investment across a range of different firms.
The ‘magic sauce’ of compounding
The average dividend yield (annual dividends as a percentage of price paid for the shares) offered by the FTSE 100 at the moment is less than 4%. But that is only an average. As I explain below, I think in today’s market I could realistically target a higher number, such as 7%.
On top of that, I would use some ‘magic sauce’ to boost my investing power over and above the £85 a week cash I would put aside. That sauce is reinvesting the dividends to buy more shares, something known as compounding.
Finding shares to buy
Although I think I could target an average yield of 7%, I would not start with yield in mind. Instead, I would aim to find great businesses with attractive valuations and only then look at yield.
As an example, consider Legal & General (LSE: LGEN). The financial services provider operates in a market likely to benefit from high long-term demand. Its strong brand, large customer base and deep financial markets expertise all give it an advantage that can translate into sizeable profits – and has done for many years.
That helps the FTSE 100 firm pay a dividend that is currently growing annually. The share has a yield of 9%.
The firm has announced plans to slow the rate of dividend growth and I see a risk that rocky financial markets could lead clients to withdraw funds, hurting profits. That led the company to cut its dividend in the last financial crisis. Still, as a long-term investor, I happily own this income share.
Great oaks start with little acorns
If I invest £83 a week and achieve compound annual growth of 7%, how much will my portfolio be worth? After 10 years, over £61,000. After 20 years, over £182,000. After 30 years, over £420,000 – and after 40 years, around £890,000!
My first move today would be to set up a share-dealing account or Stocks and Shares ISA and put in my first £83.
This post was originally published on Motley Fool
