The FTSE didn’t reward investors in 2022. Stocks, with the exception of those in resource sectors, pushed downwards.
But I’m looking at long-term investment as I attempt to turn my savings into £1m. This is the type of money that could help me in my retirement, or even allow me to retire early.
So, how could I turn £10,000 starting capital into £1m?
Slow and steady
I could invest in a highly promising growth stock and hope to see the envisaged growth be actualised. However, most growth stocks fail. So, this could be a high-risk strategy.
Instead, I prefer the slow and steady approach. I use a compound returns strategy. This is the process of earning interest on my interest. And the longer I do it, the more I earn.
I target 10% annualised growth every year. Much of that comes in the form of dividends. So, if I were to invest £10,000 and achieve 10% annualised growth, after the first year I’d have £11,000.
That’s great, but the compound returns strategy is like the snowball effect. The longer I can leave it, the more it grows.
If I were to avoid withdrawing for 35 years, at the end of the period I’d have £325,000.
Now, that’s not millionaire status, but it highlights the impact compound returns can have on my investments, turning £10,000 into £325,000.
Investing regularly
If I want to make my final pot bigger, without contributing more starting capital, I need to invest regularly.
So, if I start by adding just £120 every month, and then increasing that by 5% every year, it will have a huge impact over the long run.
In fact, after 35 years of contributing while reinvesting dividends, I’d have £1.07m. That’s a substantial figure to reach and one that could help me retire early.
Choosing wisely
In theory, the above sounds great. But the hard part is picking the right stocks.
I need companies that reward their shareholders with dividends, and I need to know that the dividends are well supported. As such, I can look at the dividend coverage ratio.
I recently topped up on Lloyds shares and it’s among my top picks right now. Discounted cash flow models suggest it’s undervalued by around 45%, and the dividend yield sits at 4.3% — analysts see the dividend increasing 25% by 2024. In 2021, the dividend coverage ratio was 3.8 — anything above two is considered safe.
Another choice would be Greencoat UK Wind, which I recently invested in. The trust offers a 4.8% yield and has achieved annualised share price growth of around 5% over five years. The fund should benefit from the trend towards greener energies, and the increasing efficiency of renewable technologies.
In the near term, higher energy prices are enhancing Greencoat’s financial flexibility. In 2022, the trust reduced debt by £50m and invested in the Hornsea 1 project — the world’s largest wind farm.
And, instead of spreading my bets wide, I’d rather focus on choosing a handful of stocks that I really believe in, taking my lead from Warren Buffett.
