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3 FTSE 100 dividend shares I think can help you become an ISA millionaire

Paul Summers — Sat, 10 Oct 2020 06:40:54 +0000

Buying dividend-paying shares can dramatically improve your chances of growing rich. Simply reinvest what you receive back into the market and wait. By the time you reach retirement, you should have a very decent nest egg. In fact, adopting such a simple strategy could even make you a millionaire!

But which dividend stocks should you buy? For those wanting to stick with only the biggest UK companies, I think these FTSE 100 constituents are great candidates.

Become a dividend millionaire

FTSE 100 power provider National Grid (LSE: NG) doesn’t have the most electrifying reputation among investors. For those looking to build their wealth by allowing dividends to compound, however, this really isn’t the point. Dull is good.

Analysts predict that the company will return 49.5p per share to investors in FY21. At the current share price, that gives a super yield of 5.3%. Now compare this to the paltry 1% interest you’re currently able to earn from the best Cash ISA available. Is it any wonder that many, including me, think holding too much cash is the biggest way of killing your retirement dreams?

Shares in National Grid currently change hands for almost 18 times earnings. That’s fairly high, at least relative to the firm’s average valuation over the last five years (13 times earnings). However, this premium is probably due to investors regarding the company as something of a safe haven in the current climate given the predictability of its earnings.

National Grid won’t make you a millionaire on its own. Held as part of a dividend-generating portfolio, however, it takes some beating.

Defensive demon

FTSE 100 defence behemoth BAE Systems (LSE: BA) might not to every investor’s taste. For those looking to become ISA millionaires by reinvesting their dividends, however, I think the firm is another excellent pick.

Having understandably paused its policy earlier in the year, the £16bn cap announced in July that it would kickstart dividend payouts again. This move, coupled with the firm’s belief that business will rebound in the second half of 2020 should be a comfort to those already invested.

The shares trade on just 10 times forecast FY21 earnings. That looks seriously good value to me, especially when you consider that the company, like National Grid, has a long history of consistently hiking its dividend.

Assuming it returns the 25p per share analysts predict in 2021, BAE yields just over 5%. The fact that the total dividend should be almost twice-covered by profits also helps to greatly reduce the possibility of a cut anytime soon.

Recovery play

Packaging giant Mondi (LSE: MNDI) completes this trio of dependable dividend payers from the FTSE 100.

Unlike the other two income stocks mentioned, analysts are forecasting a dip in the dividend next year to a little less than 59p per share. Even so, this still leaves the shares yielding 3.6% at their current price with the payout likely to be covered twice by profits.

Mondi is due to release an update on trading on October 15. The decent recovery seen in the share price of late would suggest investors are optimistic about its outlook. Not that the performance over a short trading period should really concern would-be dividend millionaires. The message for them is simple: receive, reinvest, repeat.

On just 13 times expected earnings for FY21, Mondi offers great value in my view.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

These money mantras helped make Warren Buffett a billionaire. I think they could make you rich too

Paul Summers — Mon, 07 Sep 2020 06:20:32 +0000

With a fortune estimated around $80bn, Warren Buffett is one of the richest people on the planet. While much of his success may down to his stock-picking abilities, a good portion is also due to his attitude towards money in general. As such, I think anyone concerned with growing their wealth can learn something from the Sage of Omaha.

Here are just three majestic money-management mantras Buffet lives by.

‘Never depend on a single income’

Having multiple sources of income can be a great cushion against life’s little (and not so little) tests. A second stream, perhaps by tutoring others in a skill you have or selling stuff on eBay, probably won’t match your primary wage but it should help keep the wolf from the door if the latter is suddenly taken away.

Buffett’s advice is especially pertinent in 2020. The coronavirus has already caused huge job losses around the world. With the government’s furlough scheme coming to an end in October, unemployment in the UK will surely continue to rise. Those with a second income already set up may find it easier to cope.

As a committed Fool, you won’t be surprised to learn that I think dividends are the greatest second income stream of them all. Owning a stock means you’re entitled to a share of a company’s profits. Assuming it pays these out to holders. Re-investing these cash returns back into the market and taking advantage of compounding can vastly improve your prospects of retiring rich.

‘If you buy things you don’t need, soon you will have to sell things you need’

This billionaire still lives in the same modest house he bought back in 1958. Why? Because Buffett only buys things he thinks will improve his quality of life. A sprawling mansion isn’t one of them.

Unfortunately, the unstoppable rise of online shopping and ‘one-click’ purchasing means it’s harder than ever for some people to avoid splurging on stuff they don’t need. Many will take on debt doing so, creating problems down the line.

One way of keeping your spending in check is to not wait until the end of the month and saving what’s left. Instead, set up a direct debit to transfer cash to your investment account on the day you get paid.

Treating this transfer like a regular bill payment reduces the temptation to splurge your cash on things you don’t need. It can also help develop the habit of regular investing.

‘Someone is sitting in the shade today because someone planted a tree a long time ago’

The final bit of wisdom from Buffett today is arguably the most important. Just as trees don’t grow overnight, nor will your wealth. That’s why it’s vital to start investing as early as possible.

A lot of people fail to heed this advice for fear of making mistakes. Thankfully, there are ways around this. You can employ a professional to invest on your behalf or, as Buffett recommends, buying cheap index trackers that generate the same return as the market. A portfolio containing the latter can be set up in minutes.

Alternatively, simply learn the basics of stock-picking and adapt your strategy as you go. Any errors you do make can usually be rectified if time is on your side. Ironically, the biggest risk comes from not investing at all.

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Want to become an ISA millionaire? Know when to sell shares!

Paul Summers — Mon, 31 Aug 2020 06:36:03 +0000

Here at the Motley Fool UK, it’s our belief that buying high-quality shares and holding them within a tax-efficient ISA can dramatically improve your wealth. With a bit of patience, you could even become a stock market millionaire.

Notwithstanding this, there will very likely be times in any investment career when it makes sense to sell a stock. Here’s are three reasons for doing so.

The story has changed

It’s remarkably easy to fall in love with a particular share, particularly one you’ve devoted time to thoroughly researching.

Sadly, nothing is guaranteed in the market, regardless of how good the company’s story is. Today’s dream stock can quickly become a nightmare if events (internal, external, or both) go against it. The key is learning to distinguish a major setback from a temporary hurdle.

One might argue that the investment case for travel stocks has dramatically changed in 2020 due to the pandemic. Even when the coronavirus cloud does finally lift, some companies’ share prices may remain stagnant for a long time afterward due to the financial damage they’ve endured.

A good example from a different sector would be Lloyds Bank – one of the most popular stocks with retail investors.

Despite making it through the financial crisis, anyone backing the shares in March 2009 won’t have made much money since (dividends excluded). Had they switched to technology stocks, however, the outcome would have been very different.

The price is too high

Great shares are seldom without friends and rarely cheap as a consequence. What’s more, the very best of the best just go on getting more expensive as they continually beat expectations. This explains why top UK fund manager Terry Smith thinks there are more important things to focus on than the price you pay for a stock.

Then again, there will be times when a share price becomes so utterly detached from a company’s fundamentals that taking at least some money off the table feels like the right thing to do (especially as you won’t pay tax on capital gains if it is held within an ISA). An example of this might be when a company is hyped beyond belief but has yet to make a profit.

Even if a stock’s prospects really are great, it will take time for these to be realised. Will all investors be prepared to hold and wait? I doubt it.

You’ve made a mistake

Few active ISA investors are able to strike it rich without making a few/a lot of mistakes along the way. This may be the result of acting too cautiously, recklessly, or simply picking a stock that didn’t work out.

Regardless of the reason, admitting that you’ve made a mistake can be hard. This is why we cling to losing stocks even when there’s little chance of recovery. Even if a company is able to turn things around, the numbers might still be against you. Being 50% down requires a share to double in value just to get you back to break-even.

Now, that sort of move isn’t impossible, particularly in illiquid small-cap stocks, but it can take a while if it comes at all. In the meantime, other companies are making great money for their investors.

The opportunity cost of staying invested in a loser can often be greater than accepting the loss and learning from it.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Waiting for the NEXT stock market crash? I’d do this to become an ISA millionaire

Paul Summers — Sat, 08 Aug 2020 10:31:36 +0000

With concerns about a second wave of the coronavirus growing by the day, talk of another market crash around the corner is inevitable. At least some of those who believe it’ll happen will also be aiming to sell out just in time and buy back when share prices bottom out.

Here’s why I can’t recommend this strategy.

Market crash timing

Timing the market is fiendishly difficult. Who knew back in March that stocks would experience one of the sharpest falls in history, or that the FTSE 100 would tumble to as low as 5,000?

The simple answer is no one. Not even the highly-qualified fund managers with their armies of analysts and wealth of data. There were simply too many factors at play. And if the professionals can’t do it, what chance do any of us have of predicting the next one?

There might not even be another market crash for years!

Strong recovery

Just as we couldn’t predict markets would fall so dramatically in March, nor could we foresee the recovery would be so immediate or so strong. In the US, the S&P 500 index is already back to where it was in February.

The fact that many new investors have made big money on this rebound makes picking the bottom look misleadingly easy. The survivorship bias also means we’re less likely to hear about those who sold out in March and vowed never to return.

Show me someone who has consistently and precisely timed the market throughout their career and I’ll let them manage my money. The shorter the time frame, the larger the role luck can play in stock market success.

I think there’s a better way.

A better route to riches

First and foremost, find great companies worth investing in. What makes a company ‘great’ is contentious. However, looking for the same things as some of the UK’s top fund managers is a good place to start.

Solid companies have a higher likelihood of making you money in the future, even if you need to pay a little bit more than you’d like. Buying an already-struggling business, even at a low price, makes things doubly-tough. The company must first survive a market crash and then turn itself around.

Secondly, hold as much stock as you can within a Stocks and Shares ISA or, for those with one eye on retirement, a Self-Invested Personal Pension (SIPP). Do this, and any profits you make will be free of capital gains tax.

Third, buy regularly. Since you can’t expect to win at the game if you don’t play, holding back with the aim of timing the market perfectly is a fool’s errand. Over the long term, it’s compounding that will make you a millionaire, not the brilliance of your timing.

So, accept what you can’t know and control what you can, namely fees and your risk exposure. For the former, take advantage of monthly investment plans offered by your broker. This can reduce commission costs by roughly 90%!

Lastly, check your portfolio irregularly. A watched pot never boils and your holdings won’t magically grow in value simply by looking at them. In fact, this hour-by-hour, day-by-day approach makes it far more likely you’ll think you can time the next market crash.

Spoiler: you very probably can’t.

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To become a millionaire, you need to act like a millionaire. Here’s how

Paul Summers — Sat, 31 Aug 2019 09:15:21 +0000

What springs to mind when I ask you to imagine a millionaire? Someone standing on a yacht with an attractive companion, a bottle of Champagne in one hand and perhaps a cigar in the other? I don’t blame you if you were thinking of something along these lines. It is, after all, the sort of image promoted in lavish TV adverts and on Instagram.

According to Thomas Stanley and William Danko, however, the reality is quite different. Following years of research — culminating in the publication of their classic 1996 tome, The Millionaire Next Door — they discovered that most ‘real’ millionaires rarely present themselves as being rich. Quite the opposite, in fact. You’ll probably walk past a few today and never know it. Let’s take a quick look at some of the lessons we can draw from their research.

Spend less than you earn and avoid status

It might seem obvious but spending every last penny of your monthly paycheck won’t increase your net worth. To truly become wealthy, you’ve got to be frugal and shun a lavish lifestyle. This was the top reason, the authors found, for why the people they studied were able to accumulate wealth.

Linking in with the above, Stanley and Danko also found the millionaires they met weren’t particularly concerned with impressing others. Financial independence over status was far more important. So, not only did they spend less than most, they didn’t feel the need to spend anyway.

A perfect example of this would be Warren Buffett, generally regarded as the greatest investor that’s ever lived. Despite being worth billions not millions, Buffett still lives in the same five-bed house in Omaha, Nebrasksa, he purchased way back in 1958 for $31,000. He could buy any house he wants but chooses to value his health and friendships over possessions.

Start investing early

Naturally, being disciplined with your money will only go so far. That’s why would-be millionaires need to take calculated risks to improve their lot. As far as the authors were concerned, this means learning about budgeting and investing from an early age. The more time spent planning your financial future (and less spent shopping), the better.

Obviously, there can be no guarantees in investing. That’s why here at the Fool UK, we think it makes more sense to control the only thing that you can, namely your risk tolerance. There’s little point investing in small-cap shares, for example, if you can’t bear the thought of your holdings falling by double-digit percentages on some days. Recognise too that a lot of tiny companies fail, taking once-optimistic investors’ money with them. In sum, only invest in what will still allow you to sleep at night.

Aside, from investing intelligently, the authors discovered millionaires were far more likely to work for themselves, often supplying goods or services, however mundane, to those who are already rich.

Be financially responsible

Most millionaires are self-sufficient because they didn’t rely on handouts from their parents. Stanley and Danko found those who received a lot of financial help tend to develop into what they label Underaccumulators of Wealth. In other words, they have low net worth relative to their income.

By contrast, the importance of being independent is then passed on by millionaires to their children who (hopefully) become financially savvy.

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My simple plan for making £1m from the stock market

Rupert Hargreaves — Sat, 25 May 2019 08:45:44 +0000

Making £1m in the stock market might seem like an unrealistic goal. But according to my calculations, you don’t have to win the lottery to reach this level of wealth.

Indeed, I calculate that just a few £100 a month will be enough to get you to this target, as long as you don’t try to be too smart and stick to a long-term savings plan.

Where to invest

One of the biggest mistakes most investors make is trying to chase returns. In reality, over the long term, the stock market has produced an average annualised return for investors of around 10%. By comparison, according to several studies, the average investor has achieved an actual performance of less than 5% per annum.

The reason why investor returns have been below average is because of investor overconfidence. A considerable number think they can do better than the market and try to trade accordingly. Unfortunately, the brutal reality is that this isn’t possible. According to research, you’re more likely to lose money than make anything by following an active trading strategy.

That’s why I believe the best way to make a million in the market is to use a low-cost tracker fund. This tracks the performance of an index, such as the FTSE 100 or FTSE 250, and adapts to changes in the market without you having to make any trades yourself. All you need to do is select which tracker you want to add to your portfolio and click ‘buy’.

A plan for saving

When you have decided which investment you want, the next stage is to work out how much you need to save to meet the £1m savings goal.

Two variables are required to calculate how much you need to save every month to reach that target. First, how long you have to save and secondly, the rate of return.

Over the past two decades, the FTSE 250 has produced an average annual return for investors of around 11%. Meanwhile, the FTSE 100 has produced an average annual return for investors in a region of 8% over the same time frame.

An investment in the FTSE 250 will get you to a million pounds faster, but there’ll be more bumps along the way. The index is made up of mid-cap stocks, which tend to grow more quickly but are more volatile investments. If you choose this index as your primary investment, I calculate just £250 a month will be enough to build a £1m savings pot over 35 years.

On the other hand, if you choose the FTSE 100, you will need to save around £450 a month for 35 years, assuming an average annual rate of return of 8%.

Two simple steps

Whichever route you choose, both of the examples above show just how easy it is to make £1m over the long-term if you have a fixed savings plan in place and use a hands-free index fund as your primary investment. So, if you want to make a million in the stock market, what are you waiting for?

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

How a Lifetime ISA could help make you a stock market millionaire

Peter Stephens — Sun, 19 Aug 2018 09:30:11 +0000

The Lifetime ISA has the potential to boost the retirement savings prospects for millions of people in the UK. Although it may not yet be seen as an obvious means of providing for life in retirement, it has the potential to deliver a significant income to supplement the State Pension.

In fact, due to a mix of features, it could pave the way to making a million from investing in the stock market. Here’s why it could be a worthwhile product in the long term.

Favourable terms

With the government contributing £1 for every £4 invested in a Lifetime ISA, the odds appear to be more favourably stacked in an investor’s favour than is the case through a standard ISA or sharedealing account. The government bonus could be worth as much as £32,000 during an investor’s lifetime, since it’s available from the age of 18 until 50, at which point no further contributions can be made to a Lifetime ISA.

However, the value of that £32,000 over the course of a lifetime may be much higher than it seems at first glance. In the last 20 years, the FTSE 250 has returned around 10% per annum, including dividend payments. If the maximum government bonus of £1,000 is invested in the index each year, from the age of 18 to 50, it could be worth as much as £200,000 by the end of the maximum period. And, by the time of retirement at age 67, an individual could have a nest egg of over £1m – just from the government bonus being invested and kept in the FTSE 250 over a lifetime.

Overall returns

Of course, to obtain the maximum £1,000 government bonus each year, an individual must pay £4,000 into the Lifetime ISA per year. If the total contribution of £5,000 per year (which includes the government bonus) is invested in the FTSE 250 from aged 18 to 50, and then kept in the index from 50 to 67, it could be worth as much as £5m by the time an individual retires.

Clearly, it’s relatively unlikely that a younger person will be able to invest £4,000 per year, given the cost of education, housing and possible lower earnings at the start of a career. But it shows just how powerful a Lifetime ISA could be in terms of generating wealth during the long run. And even the government bonus on its own could be worth £1m if invested in the FTSE 250 over the long term.

Takeaway

While it’s not easy to become a stock market millionaire, the government is making it simpler to achieve this goal. A Lifetime ISA may not be a particularly exciting focus for many people – especially when compared to the potential of relatively speculative investments. But in the long run, concentrating on compounding, diversification and obtaining a government bonus could have the biggest impact on whether an individual achieves millionaire status… or not.

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3 reasons why almost any investor can become a stock market millionaire

Peter Stephens — Sun, 22 Jul 2018 07:30:58 +0000

Aiming to have a £1m portfolio may not seem like a realistic goal for many investors. However, with the advent of the internet it may now be more possible than ever to achieve it. Here are three reasons why almost any investor can retire on a seven-figure portfolio.

Accessibility

The internet has fundamentally changed the way in which shares are bought and sold. In the past, going through a stockbroker would entail a very different experience than the online sharedealing opportunities of today. In many cases, there were minimum dealing amounts, or commission charges that were so high that it did not make financial sense for smaller investors to get involved.

However, all that has now changed. It is possible for investors to quickly set up a direct debit so that as little as £25 per month is invested in funds or shares of their choice. This may not sound all that significant at first glance, but all investors must start somewhere. And if a high return can be generated on small initial investments from the very start of an individual’s investing career, this could help to deliver a large portfolio in the long run.

Simplicity

In previous decades, finding out information on a company was difficult. It was often out-of-date and usually entailed a trip to a local library. Nowadays, it is simple to find out practically any information on any stock or fund. In fact, there is so much data that investors must now be ruthless in deciding which information they use to make their investment decisions.

One area which has also become simpler is buying and selling funds. Although funds have been around for many years, today their charges are lower, and obtaining information about them is much easier due to changing regulations. With it being possible to invest in a FTSE 100 or FTSE 250 tracker through the click of a mouse, it is simpler than ever to access the high growth rates which the stock market can offer.

Time

Most investors have sufficient time to build a seven-figure portfolio. For example, if an individual starts at age 18 and retires at 68 then they have many decades of compounding to help them generate a large nest egg.

As an example, if they invest £10 per week in the FTSE 250 from age 18 until they are 30, they would have £11,120 by the age of 30. Investing £25 per week from the age of 30 to 40 would mean they have £49,561 in total by the age of 40. Then investing £50 per week from the age of 40 until 68 would mean they have over £1m in their portfolio by the time they retire. These figures assume a 10% total return per year, which is in line with the FTSE 250’s performance over the last 20 years.

Takeaway

While a £1m portfolio may sound impossible to achieve, investing small amounts often can make it possible for almost any investor. With sharedealing services now highly accessible and relatively simple to use, it could be a great time to invest in the stock market.

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The biggest reason why most investors don’t become stock market millionaires

Peter Stephens — Sat, 14 Jul 2018 08:30:32 +0000

While the internet has made it easier and cheaper to buy and sell shares, it has also made it simpler to follow other investors. This can be a good thing if an individual decides to follow Warren Buffett or another successful investor, for example. However, in many cases what it means in reality is that investors follow the general consensus, and this can prove to be a disastrous move in the long run.

Information flow

In previous decades, news of changes in share prices or stock markets took time to be delivered. Even when received, it was not always possible to buy and sell shares quickly, while higher commission costs meant that in many cases investors would adopt a ‘wait and see’ approach before making changes to their portfolios. This encouraged a longer holding period, as well as a more consistent approach to investing.

Today, however, the internet means that news can be acted upon in an instant. While this may be a good thing overall, it also means that investors may become increasingly emotional about their portfolio holdings. Shares seem to move more violently than at any time in history, and they often change direction quickly even when news flow is lacking in substance.

The result of this is that many investors follow their peers into buying and selling at the wrong times. For example, selling is more common during bear markets, while the opposite is true during bull markets. And while this has always been the case to some extent, it seems to be more prevalent today with the faster flow of information and the increasing popularity of shorter-term trading in lieu of long-term investing.

Contrarian approach

For investors who wish to give themselves a higher chance of outperforming the market on their road to making a million, the best thing to do is to go against other investors. Being a contrarian investor can provide the opportunity to benefit from lower share prices in bear markets, with wider margins of safety being on offer to buyers of shares. Similarly, selling when share prices are high, but when other investors are still buying, could lead to increased profits in the long run.

Clearly, adopting a contrarian approach is easy in theory, but much more challenging in practice. That’s because it means doing the opposite of what the vast majority of other investors are doing. It can feel unnatural to buy shares when they are falling, or to sell them when they are rising. After all, the emotions of greed and fear are difficult to overcome.

However, through being a contrarian investor, it may be possible to maximise your chances of becoming a millionaire in the long run. It may take time for the strategy to have a significant impact on your portfolio, but it could prove to be a worthwhile move.

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