Image source: Getty Images
Many people dream of becoming a millionaire. Why not take action and try to turn that dream into reality? One way I like to do that is by building a portfolio of dividend paying FTSE shares. The plan may take decades to reach my target – but I think it can get there if I’m patient.
The miracle of inclusion
As an investor I have a choice of investing in growth or income shares. I can focus on one type, or I can divide my portfolio between the two types. In this plan I will invest the money in income shares. This is because I want to reinvest the dividend, hopefully in more stocks that will then start making profits themselves. This is known as a mixture.
If I put £1,000 a month in shares and compound the dividends, I should be able to grow my investment money faster than if I took out the dividends in cash.
An example of entering a million
Indeed, if I earn an average annual dividend of 9% and compound, I will reach my £1 million scheme in less than 24 years. That’s not fast, but I think it’s not too slow given the scale of the challenge. Even at age 40, starting this plan could make me a millionaire before I reach retirement age. If I had started in my mid-thirties, I could have been a millionaire before I was 55!
But the devil is in the details. In this example, I’m assuming that stock prices and dividends are constant while I’m investing. In fact, you can go down. Then again, they may climb higher, and my goal may be reached sooner.
The 9% yield is also very high compared to what many UK stocks pay. That said, there are few FTSE 100 stocks currently yielding 9% or more, including Antofagasta, Persimmon And Rio Tinto. FTSE 250 stocks have yielded more than 9% Straight line, Various Energy, Fairexpo, Jupiter And Provident Financial.
Finding FTSE shares to buy
But as stock listings show, high rewards can come with high risks. Fairexpo’s headquarters are located in Ukraine. Antofagasta faces falling prices for its main product, copper. Jupiter saw investors withdrawing money from her funds.
That’s why I don’t just focus on yield and only risk buying stocks that fall into the value trap. Instead, I looked for companies that I thought had strong business prospects and were trading at a great value. Some of the companies above meet those criteria in my view. For example, I think Direct Line has a good business because of its strong brand and strong demand for insurance. There are concerns that used car inflation could drive up costs and eat into profits. But I’ll happily keep it in my portfolio.
Indices such as the FTSE 100 capture some of the country’s biggest businesses. If I focus on finding quality stocks at the right price and stay the course for decades to come, I hope to become a millionaire.