In 2019, I set myself the personal challenge to turn £4,000 into £1,024,867 over the next 20 or so years.
I aim to achieve this by investing in UK stocks using the following parameters:-
- I need to achieve a 15% annual average return
- I need at least a 2.5% dividend yield per year
- I will personally invest a further £3,000 each year
Due to the power of compounding interest, the above parameters will get me to my goal within my time frame. But are they realistic?
15% Annual Return
I have been analysing and picking stocks now since 2014, and doing so with some moderate success.
I use a sophisticate set of rules which all stocks have to adhere to in order for me to consider buying it for my portfolio. If the stock falls short of my criteria (as most do) then I stay away.
So far, out of 957 stocks analysed, i’ve found 52 which meet my criteria. This figure can change slightly over the years as some stocks fall off the list and others join it. But the point is, not many stocks make it.
Of those 52, only a handful are priced at a level that make sense at any one time.
Again, prices are constantly in flux, so this also changes frequently.
Since 2014, my list of hand-picked stocks have collectively achieved a 139.9% return. That’s a straight-line annual growth rate of 15.5%.
You might say “that’s cutting it fine Chris, it’s only .5% higher than what you need”, and you’d be right. However, one needs to bear in mind that this is the state of play in November 2022. Prices have significantly fallen in 2022 due to the pandemic, the war in Ukraine, the global food crisis, the passing of the Queen, the higher energy prices, inflation, higher interest rates and so on.
Yet the underlying stocks are doing great. In fact, many of my favourite stocks are achieving record profits in 2021 and 2022. Yet their share price is down 50% this year.
This means that 15.5% is a worst case scenario. It already takes into account that the markets are down on average about 25-35% in 2022.
Imagine then where that average annual return will be once the markets recover.
Before 2022, the average return sat at 23%.
As a result, based on my sophisticated stock picking criteria, 15% annual average return is very much achievable and dare I say, realistic based on 9 years worth of investing which encompasses the 2020 and 2022 crash.
Some years we’ll be down. Other years i’ve achieved 38%. But averaged out, 15% is absolutely achievable.
2.5% Dividend Yield
Let me be clear, I am not a dividend investor.
I select my stocks based on a strict criteria that does not even take dividends into account.
Personally, i’m not into dividend stocks. They are a great way to make returns, but it’s not the strategy for me. In fact, I prefer when my stocks do not pay dividends. I know, it sounds crazy, but hear me out.
When a company pays a dividend it is effectively giving their profits away to shareholders. Being a shareholder, I get a slice of that dividend pay out. Now, i’ll never turn down free money. But i’d genuinely prefer they didn’t pay it. Why?
Because as a shareholder I would prefer the company keep those millions they are giving away and use them to re-invest into their own growth. Expanding the number of stores they have, opening pilot schemes into new territories or even acquiring complimentary businesses to add to the growth of the business and contribute to revenue and profits.
This is precisely how Warren Buffet’s Berkshire Hathaway has achieved its success. One of the first things Warren did when taking over majority shareholding was to stop the dividend.
Instead, the company used those dividends to build a pot of cash that it could use to acquire other companies that were highly profitable. Adding to Berkshires yearly revenue and profits.
Those increased profits would add more cash, allowing for more acquisitions.
Those acquisitions led to more profits, and so the cycle continued.
A company I own shares in could do much more with that capital than I could. So I would rather they kept it for themselves rather than give it to me. All I am going to do with my dividends anyway is reinvest it back into a growth stock. So they may as well keep it, grow, and raise their own share price.
I actively look for these behaviours when I pick my stocks. I look for companies that like to reinvest in their own growth. Typically this means the stocks I pick tend to pay lower dividends. Which is precisely how I like it.
Having analysed the historical dividend payouts of the companies I have handpicked, I have deduced that they tend to pay a collective 3.5% annual average yield. Some are higher than others. Some don’t pay any at all. But the average over the list of stocks is 3.5%.
That’s been the case since 2014, so after 9 years, I feel this is a reliable metric I can use.
As a result, my goal of achieving a 2.5% dividend yield is absolutely realistic.
£3000 Personal Investment a Year
Finally, the £3000 a year investment stems from a realistic goal to invest £250 a month into my portfolio. I’ve been doing this for a while now, and whilst i’ve probably invested more than this each year over the years, a minimum of £250 a month is something I can realistically afford to do.
This £3000 a year will help boost growth, allow me to buy stocks almost monthly, and therefore allow me to be constantly buying shares from my list of handpicked stocks based on my pricing analysis.
I only buy stocks from my list if the price makes sense. Each month prices fluctuate, and so I will often buy different stocks at different times depending on which ones are priced as bargains, and which i’d consider overpriced.
But Will This Get Me To £1,024,867?
If you start with £4,000 in Year 1, achieve a 15% return, a 2.5% dividend yield and pump in a further £3000, you’ll start Year 2 on £8,251.
Carry this on over 10 years and you’ll have £125,397.
After 15 years you’ll have £310,599
After 22 years you’ll have £1,024,867
It may take me a little longer to reach that figure if we have more crashes along the way than expected, or if my 15% annual return turns out to be 12-13% perhaps. But at the same time, I may realistically reach it sooner than 22 years.