The £1m mark is a key goal for many investors and the most effective way to hit this target is slowly, without taking excessive risks. Personally, I think the best investments to help you do this are GlaxoSmithKline (LSE: GSK) and Diageo (LSE: DGE).
Glaxo and Diageo won’t run you into Warren Buffett overnight, but they will help you meet your savings goals. Indeed, his first rule of investing is “don’t lose money”, the second rule is “don’t forget rule one”. Losing money can be extremely damaging to you investment returns and even a small 10% loss can hold you back for years.
And neither Glaxo nor Diageo will cost you money. Their shares may fall in the short term but over the long term they should push steadily higher.
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Defensive companies
You see, Diageo and Glaxo are defensive companies. Diageo is the world’s largest alcoholic beverage company, with some of the world’s bestselling spirit brands in its drinks cabinet. Meanwhile, Glaxo is a leading pharmaceutical company, which manufactures a broad selection of every day treatments and consumer goods that have become consumer staples over the years.
So, Diageo and Glaxo are not going to go out of business any time and it’s highly unlikely that either company will see its share price go to zero.
With this being the case, investors can buy and hold the two companies’ shares in their portfolios over the long term without much worry. What’s more, both Glaxo and Diageo have a history of returning the majority of their earnings to investors in the form of dividends. Through the power of compounding, these cash returns have helped accelerate total returns achieved from the investments.
The power of compounding
If you invested £1,000 in Diageo during 1995, with dividends invested that stake would be worth £5,200 today, an average annual return of 10.10%. Similarly, if you’d purchased £1,000 of Glaxo stock during 1995, that stake would be worth £4,412 today, after achieving an average annual return of 7.9%.
These figures may not seem like much at first glance, but for the long-term investor the returns really start to add up. Over four decades, a £1,000 investment in Glaxo, made during 1995 will be worth around £23,000 by 2035. However, the Diageo investment would worth a staggering £55,000 by 2035.
If you were to invest £1,000 in each company and add an additional £1,000 to each holding every year, based on the above rate of growth, your portfolio would be worth just under £1m by 2035.
Based on these numbers then, Glaxo and Diageo could make you a millionaire.
Glaxo currently trades at a forward P/E of 17.3, which seems expensive but the company trades at a discount of about 10% to its international peers. The company’s shares offer a yield of 4.9%. Diageo currently trades at a forward P/E of 20.4, in line with its international peers and the company offers a dividend yield of 2.6%.
