The FTSE didn’t reward investors in 2022. Stocks, with the exception of those in resource sectors, pushed downwards.
But I’m looking at long-term investment as I attempt to turn my savings into £1m. This is the type of money that could help me in my retirement, or even allow me to retire early.
So, how could I turn £10,000 starting capital into £1m?
Slow and steady
I could invest in a highly promising growth stock and hope to see the envisaged growth be actualised. However, most growth stocks fail. So, this could be a high-risk strategy.
Instead, I prefer the slow and steady approach. I use a compound returns strategy. This is the process of earning interest on my interest. And the longer I do it, the more I earn.
I target 10% annualised growth every year. Much of that comes in the form of dividends. So, if I were to invest £10,000 and achieve 10% annualised growth, after the first year I’d have £11,000.
That’s great, but the compound returns strategy is like the snowball effect. The longer I can leave it, the more it grows.
If I were to avoid withdrawing for 35 years, at the end of the period I’d have £325,000.
Now, that’s not millionaire status, but it highlights the impact compound returns can have on my investments, turning £10,000 into £325,000.
Investing regularly
If I want to make my final pot bigger, without contributing more starting capital, I need to invest regularly.
So, if I start by adding just £120 every month, and then increasing that by 5% every year, it will have a huge impact over the long run.
In fact, after 35 years of contributing while reinvesting dividends, I’d have £1.07m. That’s a substantial figure to reach and one that could help me retire early.
Choosing wisely
In theory, the above sounds great. But the hard part is picking the right stocks.
I need companies that reward their shareholders with dividends, and I need to know that the dividends are well supported. As such, I can look at the dividend coverage ratio.
I recently topped up on Lloyds shares and it’s among my top picks right now. Discounted cash flow models suggest it’s undervalued by around 45%, and the dividend yield sits at 4.3% — analysts see the dividend increasing 25% by 2024. In 2021, the dividend coverage ratio was 3.8 — anything above two is considered safe.
Another choice would be Greencoat UK Wind, which I recently invested in. The trust offers a 4.8% yield and has achieved annualised share price growth of around 5% over five years. The fund should benefit from the trend towards greener energies, and the increasing efficiency of renewable technologies.
In the near term, higher energy prices are enhancing Greencoat’s financial flexibility. In 2022, the trust reduced debt by £50m and invested in the Hornsea 1 project — the world’s largest wind farm.
And, instead of spreading my bets wide, I’d rather focus on choosing a handful of stocks that I really believe in, taking my lead from Warren Buffett.
The post I’d aim for a million, investing in just a handful of FTSE stocks! appeared first on The Motley Fool UK.
However, don’t buy any shares just yet
Because my colleague, Mark Rogers, has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with rampant inflation, a “cost of living crisis” and war in Ukraine, knowing where to invest has never been trickier. And yet, with so many shares below recent highs, there are also potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s “Foolish” analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Secure your FREE copy
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#ffffff”, ‘color’, ‘#FFFFFF’);
})()
More reading
Warren Buffett isn’t buying Tesla shares despite the huge sell-off. Why is that?
Trading update: which of these 3 builders is likely to cope better with the UK recession?
Here’s how I’d invest £20,000 in a Stocks and Shares ISA to try and build long-term wealth
Income stocks: a once-in-a-decade chance to get rich?
UK stock market: a wealth of investment opportunities!
James Fox has positions in Lloyds Banking Group Plc and Greencoat UK Wind. The Motley Fool UK has recommended Greencoat Uk Wind Plc and Lloyds Banking Group Plc. 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.