Compounding really is a magic phenomenon. And I’m calculating what regularly investing small amounts in FTSE shares could mean for me in 20 or 30 years’ time.
I’ve always liked dividend shares for my portfolio. And I think targeting those with the highest yield could make me a million!
Dividend shares
The average yield in the FTSE 100 is currently sitting between 3% and 4%. This is not to be sniffed at. It’s well in excess of the Bank of England base rate, so represents a good place to put my spare cash.
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However, some of the higher dividend payers in the FTSE 100 are offering well above the average. At the time of writing, some of the top dividend payers are Persimmon (16% dividend yield), Rio Tinto (11%) and Abrdn (10%).
The FTSE 250 also has several companies offering a dividend yield above 10%.
Now, of course, there is more to an investment than dividend yield alone. And these yields will change over time. But this information shows me the potential returns if I reinvested those dividend payments.
And if I add into the mix a steady regular £250 per week investment, the exponential curve could be very steep!
How long will it take to get to £1m?
This approach may never take my portfolio value to a million, but with some simple maths, I can make an estimate.
If I start today with nothing, and purchase £250 per week of FTSE shares averaging a 10% dividend yield, my portfolio would reach £1m in year 22. And at this point, I’d only have put in £286k from my regular weekly payments!
When I compare this to investing in average-yielding FTSE shares, say 4%, it would take me 36 years, and I’d have put in almost half of the £1m myself!
For both scenarios, I’m assuming I receive all the dividend income at the end of the year and re-invest it immediately.
Other factors
It’s important to consider other factors that could impact this plan.
The companies that I invest in to yield 10% dividend return will change in value as the share price rises and falls. They could reduce in value, meaning it would take longer to reach my £1m goal. Or increase in value, meaning I reach my goal quicker.
There is also a risk that the companies I invest in don’t pay dividends at 10% yield for each of the next 20 or so years. Again, the impact of this if the yield is reduced would be that my goal is reached later.
I might also be able to find companies offering above 10% yield outside of the FTSE indices. But for me this comes with too much risk. So I’ll be sticking to large, proven businesses listed in the UK.
With interest rates still low, I think high dividend FTSE shares are a great way of trying to grow my portfolio to a million!
