For those with a bit of spare cash, dividend shares can be a great way of building a valuable portfolio. Pick the right ones and a modest investment could grow very quickly.
Here’s how.
A miracle?
I believe the key to producing big gains from income shares is to reinvest the dividends. That way it’s possible to enjoy the remarkable benefits of compounding.
But a small percentage point difference in the yield can have a big impact. By way of example, this is how long it would take for a portfolio to double in value depending on the overall dividend yield:
- 3% – 278 months
- 4% – 209 months
- 5% – 167 months
- 6% – 139 months
- 7% – 120 months
- 8% – 105 months
At 7%, it means £10,000 would grow to £20,097 in 10 years.
A rule of thumb
Alternatively, the Rule of 72 can be used to help with the maths. If you divide 72 by the annual rate of return, it will give the number of years (approximately) in which an investment will double.
For example, 72/8 = 9 years. That’s not too far away from the 105 months (8 years and 9 months) shown above for an 8%-yielding portfolio.
But is an 8% yield realistic? I think it is.
Lots about
Admittedly, there aren’t any members of the FTSE 100 currently (17 June) yielding 8%. But look elsewhere, and you will find plenty. For example, the FTSE 250’s home to 16 of them.
Of course, dividends can’t be guaranteed. As they are a distribution of profit, they will fluctuate in line with earnings.
Also, it’s important to be cautious when it comes to high-yielding shares. Investors could be demanding a higher return because the perceived risk of owning the stock is much greater. One company that I think this applies to is Victrex (LSE:VCT).
But could sentiment be about to change?
What’s going on?
The group manufactures PEEK-based high-performance thermoplastic polymers. Although PEEK (polyether ether ketone) isn’t exclusive to the company, Victrex does have several patents relating to specific products in which it’s used.
But an investment in a new manufacturing facility in China has been a bit of a disaster. Following a review, it’s concluded that the plant isn’t capable of delivering the anticipated volumes. Although Victrex believes the country will be its fastest-growing market over the next decade, it’s going to have to spend more to increase capacity at the facility.
This has led to a loss of investor confidence and a falling share price. The result? A rising yield.
| Financial year | Dividend yield (%) |
|---|---|
| 30.9.21 | 2.6 |
| 30.9.22 | 3.6 |
| 30.9.23 | 4.2 |
| 30.9.24 | 6.1 |
| 30.9.25 | 8.3 |
With a current return of 9.6%, the Rule of 72 tells us that it would take 7.5 years for an investment to double in value.
My view
Under a new boss, Victrex has embarked on a profit improvement programme, which includes a 10% headcount reduction. And he’s optimistic when talking about the sales pipeline.
However, during the six months to 31 March, the group’s net debt increased by £20.6m. And compared to the same period a year earlier, its margin, gross profit, and earnings per share all fell.
To be honest, I can see why investors are nervous and why they are demanding a return of nearly 10%. On this basis, I’d rather take a look at the other 8%+ yielders on the FTSE 250.
Should you invest £5,000 in Victrex Plc right now?
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James Beard does not own shares in any of the companies mentioned.
