Image source: Getty Images
Lots of people have ideas about how they can build wealth. Choosing businesses that have often shown they can help achieve this goal are among those large enough to be included in the FTSE 100 or FTSE 250 stock market indices.
Simply by piggybacking some of those businesses through buying shares could be a basis to which to build long-term wealth.
Large doesn’t necessarily mean successful
However, there are some things to be aware of. For example, while the FTSE 100 is a collection of Britain’s largest listed companies by market capitalisation, that does not necessarily mean that they are all successful now, or will be in the future.
Sometimes a share can grow in value because enough investors are excited about the business prospects, even if they remain unproven.
In other situations, a company may be in the FTSE 100 because of its successful track record, while a changing environment may make it hard for the firm to keep doing as well.
Two ways to build wealth
Another important factor to bear in mind when hunting for FTSE shares to buy is that a successful business does not necessarily make for a successful investment.
Why? If someone overpays for its shares, even a great business can be a bad investment. That is why valuation matters – and investors who are serious about trying to build wealth are therefore serious about value.
Share price gain is one way in which long-term investors can aim to build wealth. Another is dividends: FTSE 100 companies alone are paying out well over £1bn a week on average to shareholders in the form of dividends.
But dividends are never guaranteed to last. A company may stop earning enough cash to fund them, or simply decide it has other spending priorities.
Investing with care and realism
Clearly, care must be taken when investing. An investor needs to take into account factors such as valuation, portfolio diversification and the likelihood of a share paying dividends in future.
Still, I think an investor who takes a considered approach and is realistic about their goals could aim to build wealth over time.
Is that simple? It could be, but it might not be. Some shares do as well as hoped or better, but others can disappoint.
Still, I do not think the approach need be overly complicated. It basically boils down to investing enough money to give a solid foundation, making smart, well-informed choices, and taking a long-term perspective.
Putting the theory into practice
As an example, one FTSE 100 share I think investors ought to consider is insurer Aviva (LSE: AV). The Aviva share price has risen 108% over the past five years.
It currently yields 5.7% and the dividend per share is now higher than it had been before a cut back in 2020.
Insurance is a massive market and one I expect to stay that way. Aviva’s leading position in the UK market is both a strength and a weakness. It lets the company benefit from economies of scale. But it also brings the risk that smaller rivals may try to undercut the company on price, threatening its profitability.
With its strong brand and massive customer base though, I see Aviva as a share for investors to consider.
