I'm not necessarily looking at names like BHP Group Ltd (ASX: BHP) or Commonwealth Bank of Australia (ASX: CBA) for strong compound growth. They are already huge businesses and I'm not sure how much bigger they can become.
However, there are some businesses that are smaller and look like they can grow profit a lot more.
If businesses can grow their earnings, then the share price can rise as the market appreciates that growth in scale, even if the price/earnings (P/E) ratio stays the same.
A company can decide to pay dividends from that profit, enabling shareholders to benefit from the cash generated, without having to sell their shares. Businesses that keep a good amount of profit within the business can re-invest strongly for further growth.
The road to $1 million with ASX income shares
With ASX income shares, we can decide what we want to do with the dividends. With the goal of $1 million in mind, I'd want to re-invest my dividends back into buying more shares when I can.
That doesn't necessarily mean we have to use each company's dividend re-investment plan (DRP). We can take the dividends as cash and put that money into the ASX income share that seems the best value at the time. The franking credits are a bonus for low tax bracket Aussies, while they can reduce the tax owing for high tax brackets.
The share market has typically delivered average returns per annum of around 10%, so I'm going to use that in my example calculation, though past performance is not a guarantee of future performance.
If the ASX income share portfolio delivers an average return per annum of 10% on $327 invested every month, it would grow into $1 million in less than 35 years. That may seem like a long time, but a 25-year-old could become a millionaire by 60. We can accelerate that wealth-building by either investing more or finding companies that can grow faster.
But, trying to achieve stronger returns can be more risky and lead to failure with some investments.
Which kinds of dividend stocks could do the job?
A lower-risk ASX income share that could do the job is a name like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which is an investment conglomerate with a diversified portfolio.
If I were looking for ASX income shares with good yields from day one, but could also deliver long-term capital growth, I'd want to build a portfolio of names that have a good dividend yield, a strong core business and plans for growth. Names that come to mind are Wesfarmers Ltd (ASX: WES), Premier Investments Limited (ASX: PMV), GQG Partners Inc (ASX: GQG), Sonic Healthcare Ltd (ASX: SHL), Accent Group Ltd (ASX: AX1) and Propel Funeral Partners Ltd (ASX: PFP).