There is an impression among many investors that big riches can only be achieved with ASX growth shares.
But that can't be further from the truth. There are multiple paths to the promised land.
The fact is that strong returns are possible with ASX dividend shares.
Let's take a look at how you could turn $5,000 into $50,000 this way.
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Compounding is like magic
The way to grow your portfolio using dividend stocks is to utilise the magic of compounding.
So rather than treat dividends as income, reinvest it immediately. This can be done manually, or automatically using a dividend reinvestment plan (DRP).
The great advantages of a DRP are that you don't need to worry about execution, the share purchase price could be cheaper than market value, and there is no brokerage fee.
This means that an initial $5,000 outlay could balloon into $50,000 after 27 years if a 9% yield is continually reinvested.
Not bad.
But in reality, $50,000 could be reached much faster.
There are three ways the returns could be supercharged:
- Franking: Australian investors are lucky enough to have this tax benefit if you pick stocks for certain companies that have already paid company tax.
- Capital growth: If you pick the right dividend stocks, the share price itself may rise to provide extra returns.
- Regular contributions: You don't have to stop at $5,000! If you add a small amount to the portfolio every once in a while, it makes a huge difference to the end result.
After franking and capital growth, let's assume you can bump up the annual returns from 9% to 12%. Then let's say you chip in $100 each month.
That way you'll turn $5,000 into $50,000 in just over 12 years.
Amazing. That's the power of compounding.
3 ASX dividend shares that could land you a 10-bagger portfolio
So which are the best dividend stocks to buy now to achieve such returns?
Remember, that blindly picking the ASX shares with the highest dividends is asking for trouble.
One must balance decent yield with positive business prospects. You don't want the share price to shrink over time, nor do you want the dividends to collapse because the company is in financial trouble.
Here are three suggestions that fit the bill: McMillan Shakespeare Ltd (ASX: MMS), Australian Clinical Labs Limited (ASX: ACL), and Ampol Ltd (ASX: ALD).
McMillan Shakespeare and Ampol pay out a dividend yield of 8.64% and 8.95% respectively. Australian Clinical Labs is handing out a stunning 13.3%. They are all 100% franked.
Professional investors like the business prospects of all three companies.
According to CMC Markets, four of five analysts currently covering Australian Clinical Labs rate the stock as a strong buy. Five of seven reckon McMillan Shakespeare is a buy, while 11 out of 12 say that about Ampol.
No analyst surveyed on CMC Markets rated any of the trio as sells.
