One way I aim to build my wealth is by investing in large, blue-chip companies that regularly distribute cash among their shareholders. At the moment, quite a few FTSE 100 dividend shares look attractively priced to me. In fact, I regard them as cheap compared to the long-term value I think they offer me.
By building a portfolio of such shares, I think I can realistically try to double my money within a decade. Here is how I would go about it.
Dividend shares and wealth building
One of the things I like about shares that pay me large dividends is that I can all but ignore them for years at a time while they pile up dividends in the background. That is why I think owning such shares can be a good way for me to build wealth over the long term.
Not all shares pay dividends though, including some that have paid out in the past. So I am careful to try and buy into businesses I think have excellent long-term income generation potential that could help them fund dividends.
That knocks out some companies that are in growth mode and reinvest profits in the business instead of distributing them among shareholders, like Google parent Alphabet. It also means I am wary of firms with large debts or those that face declining customer demand.
I weigh each company on its specific merits. For example, British American Tobacco has a lot of debt and its core cigarette market is shrinking. But it still has the potential to remain a cash generation machine and is among the dividend shares I own in my portfolio. Its current price-to-earnings ratio of 10 looks cheap to me.
Aiming to boost my returns
There are two things I can do when a dividend is declared. One is to take the payout as cash. But another is simply to reinvest it in more shares, something known as compounding.
Doing this is like pushing a snowball downhill and watching it get bigger. Over time, hopefully, I will effectively start to earn dividends on my dividends. That will help me grow my wealth faster.
By compounding at an average annual rate of 7.3%, I ought to have doubled my money 10 years from now (assuming a constant share price for the sake of this example).
Is a 7.3% yield achievable? I think it is in today’s market. In fact, that is exactly the yield currently offered by British American. I would diversify my portfolio across a range of blue-chip companies though, not just stick to one. It is not guaranteed, of course, but I think I have a good chance.
Finding income shares to buy
The actual yield I achieve will depend on the shares I buy. I start by looking for great businesses selling at an attractive share price. Yield is important to me when it comes to choosing dividend shares to buy, but it is not my main consideration.
My focus is investing in quality companies. Buying a high-yielding company today that cuts its dividend tomorrow because business is weak could be a big mistake for me. Instead, I hunt for blue-chip quality on sale. Right now, I see lots of dividend shares I think meet that definition!
