Since I started investing in 1986, my strategy has evolved massively over four decades. At first, investing felt thrilling, giving me a gambling-like buzz. Today, I’d define myself as a value/dividend investor keen on generating passive income.
But what changed? I got old…
Time to change
My investing approach didn’t change suddenly. Over many years, I realised that the best thing is to avoid making expensive mistakes. As my hero Warren Buffett advised, “Rule #1 is never lose money. Rule #2 is never forget rule #1”.
For the record, my three worst investments cost me close to £1m in losses. After my third howler, I decided to get rich slowly, rather than taking big risks chasing big returns. For me, value investing — buying undervalued shares in solid companies — felt like the right way forward.
American poet Ralph Waldo Emerson once wrote, “The years teach us much which the days never knew”. My wife has also been investing since late 1980s. A few years ago, I discovered that she had never lost a penny in all those years. Her strategy was simple: buy discounted shares in her employer (a FTSE 100 firm) and reinvest her dividends. That’s it.
At last, I grew to understand what works best for me and my family. Buy into good businesses at fair prices, collect and reinvest our share dividends — and avoid needless fiddling with our portfolio.
Turning cash into capital
Simply put, investing involves putting money away today with the aim of having more money in the future. One established way to do this is by using dividends to buy ‘free’ shares.
Dividends are regular or one-off cash distributions paid by some companies to their shareholder owners. The first snag is that not all listed companies pay dividends. A second hitch is that future dividends are not guaranteed, so they can be cut or cancelled at short notice. That said, many household-name UK companies have delightful dividend histories.
My wife and I work, so we don’t yet need income from dividends. Hence, we reinvest all dividends from our shareholdings into more shares. This increases our ownership base, boosting future returns.
Viva Aviva!
For example, my family portfolio includes shares in British insurer Aviva (LSE: AV). Aviva is the result of the merger of hundreds of insurance companies over hundreds of years.
Aviva provides life and general insurance, as well as pensions and savings. Thus, its success is tied to the health of stock markets, which have boomed since 2022. Today, Aviva employs over 36,000 people and services over 25m customers in the UK, Canada, and Ireland.
As I write, Aviva stock stands at 610.2p, valuing this group at £18.3bn. Though the shares are up 48% over the past five years, they have fallen 0.5% over the past year. (These returns both exclude Aviva’s generous dividends.)
At present, Aviva shares offer a market-beating dividend yield of 6.5% a year — more than double the FTSE 100’s cash yield. Also, given the shares hit 700.8p on 6 January, I see them as having significant potential — assuming markets stay healthy.
Then again, the US stock market looks volatile and could drag down asset values. If markets tumble, then Aviva’s earnings, profits, and cash flow would suffer. Even so, we will keep our stock for the long run!
Should you invest £5,000 in Aviva Plc right now?
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Cliff D’Arcy has an economic interest in Aviva shares.
