The idea of becoming a millionaire is usually looked at as a lofty goal – reserved for bright-eyed kids or overly ambitious university finance students.
But these days, the average family is usually pretty close to a net worth of a million dollars (if you include the value of superannuation and the family home).
Still, having a million-dollar investment portfolio outside super is a much more exclusive club. But it is easily achievable for most people if you throw in three growth catalysts – ASX dividend shares, compound interest, and time.
Let me explain.
Compound interest is one of the most under-appreciated forces of everyday life. Einstein even called it the 'eight wonder of the world' and it can help make you into a millionaire.
Consider someone who invested into a uncomplicated market-wide exchange traded fund (ETF) – something like the SPDR S&P/ASX 200 Fund (ASX: STW) that simply tracks the largest 200 companies in Australia, everything from Commonwealth Bank of Australia (ASX: CBA) to Woolworths Group Ltd (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS).
Since 2001, an investment like this has delivered capital growth at an average rate of 3.46% and a dividend yield of 4.72%, giving you a average total return of 8.18% per year.
If this hypothetical investor decided to put $20,000 into an ETF like STW in 2001, plus an additional $1,000 per month, but decided to take the dividends from this investment and spend them on a big birthday bash every year, it would take roughly 38 years for this money to turn into a million dollars.
But, if that same investor reinvested the dividends back into the ETF and allowed them to compound instead of throwing a party, it would only take 23 years to reach the 7-figures.
And if this said investor was 20 and waited 45 years until retiring before touching the money, it would have grown to a princely sum of $6.39 million (as opposed to $1.39 million if they spent the dividends along the way).
Foolish takeaway
This example shows the power of dividends and how they are a major component of stock market returns. So when you're investing, treat your dividends with the respect they deserve and you will be on your way to entering that most exclusive of clubs!
