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Investing in shares and earning extra cash from dividends isn’t just for the ultra-rich. The stock market allows anyone to become an owner of some of the world’s best companies.
Being a business owner isn’t for everyone and it takes a certain temperament to cope with the ups and downs of investing. But while the risks are real, the potential opportunities are enormous.
Savings
According to a recent study from mutual insurer The Exeter, around 20% of UK citizens aged 45-54 have no savings. That puts them in a precarious position, but there is good news.
Over the last decade, the FTSE 100 has returned just over 8% a year. By investing £100 a month at that rate, a 45-year old could have £60,825 in the bank by the time they reach their 65th birthday.
Financial security, though, isn’t just about having a high net worth on paper. It’s about having cash that you can use to pay bills, buy food, or for unexpected expenses that might come up.
This makes the stock market look risky, since long-term growth can be punctuated by periods when share prices can go down suddenly. And investors who sell at these times might end up with a loss.
With the FTSE 100, though, a lot of that 8% return hasn’t come from share prices going higher. They’ve come from businesses returning their profits directly to investors in the form of dividends.
This gives shareholders a source of income that they can decide what to do with. They have a choice between spending it, or reinvesting it to earn even higher returns in the future.
Growth and dividends
Different companies have different views about what they should do with their net income. But this is mostly between using it to generate higher profits in future or returning it to shareholders.
Exactly what the right thing for a business to do depends on what opportunities it has. The best ones, however, are able to grow their net income over time while still returning cash to investors.
Unilever (LSE:ULVR) is a company that I think is better at this than a lot of people give it credit for. Over the last 10 years, the firm has distributed around 66% of its profits as dividends.
That doesn’t leave the firm with much cash to invest into growth. And in an industry where customers can easily switch to other products, it’s important not to take anything for granted.
Despite this, earnings have grown steadily and I think there could well be more to come in future. The company is currently selling off some of its less impressive divisions to generate extra cash.
This can be used to boost growth even further and support future dividend increases or returned directly to investors. Either way, it could be a real positive for the company’s shareholders.
Investing can be a great way of working towards long-term financial security. And the extra cash generated from dividend shares can also help in the short term.
The average annual return from the FTSE 100 in the last 10 years has been over 8%. While there are no guarantees going forward, I’m betting on this to outperform cash savings over the long term.
