As your income increases or life goals shift, revisit your investment plan. You might want to invest more, explore real estate, or adjust your risk level as retirement approaches. But the foundation—consistent, long-term investing in diverse, low-cost assets—rarely needs dramatic change.
Celebrate Progress, Not Perfection
You won’t do everything perfectly, and that’s okay. What matters is that you’ve started. Most people never invest at all. Celebrate each milestone: your first $1,000 invested, your first dividend payment, your first market recovery. These small wins are the building blocks of real wealth over time.
Building Wealth From Scratch
Wealth Starts With Action
You don’t need a finance degree, a six-figure salary, or a Wall Street advisor to build wealth. You just need to get started, stay consistent, and keep learning. Rookie investors who commit to the basics early on are often the ones who achieve the most impressive results decades down the road. Start today and let time do the rest.
Chelverton UK Dividend Trust PLC (“SDV” or the “Company”)
SDV Update
Further to the announcement on 24 April, the 2025 ZDPs have now been repaid in full, and the Company currently has no borrowings or gearing. The Company has net assets of £ 30.85 m, as at 7 May 2025, across a diversified portfolio of small and midcap companies.
The Manager believes that there are compelling opportunities within the mid- and smaller UK companies universe and that the application of a rigorous investment discipline, combined with patience and a long-term outlook, can produce outstanding returns for investors. The changing macroeconomic environment, notably lower inflation and the beginning of interest rate cuts in the UK provide an accommodating backdrop for mid- and smaller UK companies.
Dividend for year ending 30 April 2025
Further to the announcement of 5 March 2025, it continues to be the Board’s intention to pay the fourth interim dividend of 3.25p, which when added to the preceding three quarterly dividends would bring the total to 13.00p, for the year ending 30 April 2025.
Dividend Policy
As the Company is now ungeared, post the repayment of the final capital entitlement of the 2025 ZDPs, the underlying income from the restructured portfolio will lead to reduced dividend payments to ordinary shareholders. However, the Company has significant revenue reserves (£2.8m as at 31 October 2024, the last reported date), which can be used to supplement the underlying income.
Consequently, the Board announces its intention to pay 2.5p per ordinary share on a quarterly basis being a total of 10.00p per ordinary share per annum for the next three years ending 30 April 2028 (subject inter alia to market conditions at the time), effective from the first interim dividend in respect of the year to April 2026. The shares will therefore provide a yield of 7.6% (based on the closing share price as at 8 May 2025). This dividend target takes into account the Company’s revenue reserves and assumes no change in the underlying portfolio income.
The Board believes this represents a compelling combination of an attractive dividend yield and the potential for capital upside from any recovery in the UK small and midcap market.
Outlook
The Board and the Manager are confident in both the Company’s prospects and in the current portfolio’s potential for growth.
As market circumstances develop, the Company will seek opportunities to reintroduce gearing into the Company’s structure. The Company continues to actively consider alternative financing options and will provide a further update as required.
A reduced dividend but still above 6% so it will remain in the Watch List, that is until it isn’t.
The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.
Image source: Getty Images
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.
Investment trusts can deliver large returns while allowing investors to effectively diversify. But times have been tough for these companies more recently.
Victoria Hasler, head of fund research at Hargreaves Lansdown, notes that
She also notes that “over the last couple of years we have seen some good quality investment trusts trading on hefty discounts“. This remains the case as we head into the New Year.
So I’m searching for the best value trusts to consider today. Here are two of my favourites.
Octopus Renewables Infrastructure Trust
Donald Trump’s return to the presidency has sent a shockwave across renewable energy stocks. Even companies with little-to-no exposure to the US have slumped following November’s election.
This provides a terrific dip buying opportunity in my opinion. One such business that’s caught my attention is Octopus Renewables Infrastructure Trust (LSE:ORIT).
At 63.5p per share, it trades at a huge 38.7% discount to its estimated net asset value (NAV) per share of 103.6p.
Recent share price weakness has also turbocharged Octopus’ dividend yield to 9.5%. To put this in context, the average for FTSE 100 shares is way back at 3.6%.
I like this trust because of the excellent diversification it offers. It generates power from offshore and onshore wind turbines as well as from solar farms. This allows consistent power generation across all seasons, and boosts efficiency by using technologies that are tailored to different environments.
With assets across the British Isles, Finland, Germany, and France, it can also remain profitable despite poor weather or regulatory issues in one or two regions.
Importantly, it also has no exposure to the US, removing uncertainty over the future of green policies under President-elect Trump.
Such fears — however impractical — may continue to weigh on Octopus’ share price. But over the long term I think it could prove a robust investment.
Gore Street Energy Storage Fund
The Gore Street Energy Storage Fund (LSE:GSF) shares several characteristics with the Octopus trust.
Its share price has declined due to falling confidence in renewable energy. This is because demand for its technologies are tied to growth in the renewables sector, where they provide a stable flow of energy even during unfavourable weather.
Gore Street is also vulnerable to higher interest rates that dampen asset values and increase borrowing costs.
But like Octopus, it also offers excellent value I find hard to ignore. At 50.6p per share, the trust trades at an 49.7% discount to its NAV per share of 100.7p.
Meanwhile, its forward dividend yield is a staggering 13.9%.
This is another share with considerable long-term potential as the world switches away from fossil fuels. Bloomberg estimates the global energy storage market will experience an annual growth rate of 21% between now and 2030.
And Gore Street is rapidly expanding to supercharge long-term revenues. Operational capacity leapt 45% in the 12 months to September, to 421.4 MW.
A 9.16% yield! Here’s the eye-catching dividend forecast for this hotshot
Jon Smith eyes up a juicy dividend forecast for a renewable energy stock that has a dividend policy aiming to increase by inflation each year.
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Jon Smith
Image source: Getty Images
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Trying to find stocks with a high dividend yield is one thing. Finding ideas that have a good track record and look sustainable is another. Looking at a potential contender’s dividend forecast is a good way to see what the future could hold instead of just focusing on past payouts.
Here’s one idea I think’s worth considering.
Details to note
I’m talking about the Octopus Renewables Infrastructure Trust (LSE:ORIT). It has a current dividend yield of 8.81%, with the stock down 5% in the past year.
The investment company focuses on generating income and growth for shareholders by investing in renewable energy assets across Europe, the UK, and Australia. This includes projects like offshore wind farms, solar parks, and battery storage facilities.
It makes money primarily by selling electricity produced by its renewable energy assets. Given that these are often sold as part of long-term contracts, it historically has good predictable cash flow. This makes it appealing for income investors.
From the dividend side, it typically pays out money each quarter. It has a policy to increase its dividend target in line with inflation. So compared to the 6.02p total from 2024, the announcement was made at the start of this year that it would be raised by 2.5%. As a result, the total payout for this year should be 6.17p.
When I consider the current share price of 69p, this would equate to a yield of 8.94%. If I assume inflation runs at 2.5% for this year, 2026 could see a dividend raised to 6.32p. Using the the current share price again, this would translate to a yield next year of 9.16%
Fighting inflation
Having a clear dividend policy with the aim of increasing the income by the pace of inflation is great. In theory, it allows an investor to not have their income eroded by inflation over time.
However, it’s not always possible to do this. For example, if inflation spiked suddenly to a very high level, management might not be able to honour the policy. After all, the business is only able to generate a certain amount of profit. It would struggle to boost the dividend by X% if earnings for the year only increase by Y%.
A risk is that interest rates stay higher for longer in the UK, putting pressure on finances. Large-scale projects are partly funded by debt. So if the interest rate doesn’t fall as fast as some are expecting, the funding costs will be larger than anticipated. This could filter down to lower profit.
Even with these concerns, I believe the trust is an excellent option for sustainable income. The fact that it operates in the renewable energy sector should also mean it has long-term demand.
Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
We think earning passive income has never been easier
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for growth on your initial investment.
To see if there is any further research for your Snowball type the ticker (ORIT) in the search box.
Investing for a second income is becoming more challenging as recessionary risks grow in key economies. Dividends from a broad range of UK shares could be under threat if earnings stagnate or fall.
High energy
With a 13.4% forward dividend yield, SDCL Energy Efficiency Trust‘s (LSE:SEIT) one of the top three highest-yielding investment trusts on the London stock market.
As its name implies, this trust owns assets that seek to improve energy efficiency and reduce carbon emissions. These include electric vehicle charging stations, rooftop solar panels on retail buildings, and waste heat recovery systems for industrial clients. In all, it has 50 different projects on its books.
These span both cyclical and defensive sectors — such as healthcare, retail and data centres — as well as different parts of the world. Around two-thirds of its assets are in the US, with the remainder spread across the UK, Asia and Mainland Europe. This diversified approach facilitates a smooth stream of income even if individual industries or territories suffer turbulence.
As the chart below shows, SDCL’s dividends have grown each year since the trust’s initial public offering (IPO) six years ago.
Source: dividenddata.co.uk
That’s not to say future earnings aren’t immune to pressure however. I’m especially mindful that changing green policy in the US under the Trump presidency could limit future returns.
Good health
Primary Health Properties (LSE:PHP) is another investment trust with sky-high dividend yields and a long record of payout growth. Indeed, annual dividends here have risen for 28 straight years.
This partly reflects its classification as a real estate investment trust (REIT). Under sector rules, at least 90% of earnings from its rental operations must be distributed in the form of dividends.
Source: Primary Health Properties
It’s also because of its focus on the ultra-defensive healthcare sector. The vast majority of its 500-plus properties are doctor surgeries, with other properties including dentists, pharmacies and diagnostics centres.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Profits could be at risk if NHS policy changes unfavourably. However, the cost benefits that primary healthcare in general brings means such actions are unlikely (if not totally off the table). Just this week, the UK government announced a £102m cash injection to build new surgeries and modernise existing ones.
Primary Health Properties’ forward dividend yield is also a market-beating 7%.
The post 7% and 13.4% dividend yields! 2 investment trusts to consider for a second income appeared first on The Motley Fool UK.
(“Custodian Property Income REIT” or “the Company”)
Active asset management continues to drive income and valuation growth, underpinning fully covered dividend
Custodian Property Income REIT (LSE: CREI), which seeks to deliver an enhanced income return by investing in a diversified portfolio of smaller, regional properties with strong income characteristics across the UK, today provides a trading update for the quarter ended 31 March 2025 (“Q4” or the “Quarter”) and the year ended 31 March 2025 (“FY25”).
Commenting on the trading update, Richard Shepherd-Cross, Managing Director of the Investment Manager, Custodian Capital Limited, said: “This Quarter’s performance further emphasised the benefits of portfolio diversification, which combined with our hands on approach to generating strong income growth, has helped support three consecutive quarters of capital appreciation.We believe the current discount provides an attractive entry point for investors, especially given our long track record of fully covering the dividend, with shares currently yielding around 8%.The 17 lettings, lease renewals, re-gears and rent reviews we completed during the Quarter were achieved at significant aggregate premiums to ERV and previous rent, and our ongoing investment in solar panels at our properties has begun to prove its worth as a potential source of future revenue and value creation.
“We also believe that during periods of trade uncertainty such as the one the world now finds itself in, it would not be unreasonable to view UK real estate as a relatively safe haven for investors seeking stable asset backed income in established and secure jurisdictions.This should be particularly true for the Company’s diversified investment strategy that generally targets sub £10m, higher yielding, regional assets across the UK, that principally serve a local and/or domestic market.”
Highlights
Strong leasing activity continues to support rental growth, underpinning fully covered dividend
1.5p dividend per share approved for the Quarter, achieving aggregate FY25 dividends per share of 6.0p, in line with target, and fully covered by unaudited EPRA earnings per share
Target dividends per share of no less than 6.0p for the year ending 31 March 2026. This target dividend represents a 7.9% yield based on the prevailing 76p share price
EPRA earnings per share of 1.6p for the Quarter (Q3: 1.5p)
EPRA occupancy decreased to 91.1% (31 Dec 2024: 93.4%), primarily due to a previously flagged industrial unit becoming vacant in Biggleswade, which provides an opportunity to refurbish and improve the rental rate, and an office in Sheffield where we are assessing the options. The industrial asset in Biggleswade is already under offer to let subject to a refurbishment. 4.0% of estimated rental value (“ERV”) is vacant and being or about to be refurbished or under offer to let or sell (31 Dec 2024: 1.8%)
During the Quarter, this decrease in occupancy resulted in a 1.2% decrease in like-for-like passing rent. However, like-for-like ERV increased by 1.5%, primarily driven by 2.1% like-for-like growth in the industrial sector
Significant potential for further income growth with the portfolio’s ERV of £50.2m exceeding the current passing rent of £43.9m by 14% (31 Dec 2024: 11%). Approximately 30% of this reversion is available from leasing events with the remainder from letting vacant space. Based on our track record and occupier demand for space, we expect to capture this potential rental upside at (typically) five-yearly rent reviews or on re-letting, with an opportunity to do so across c. 17% of the portfolio’s income in FY26. We expect to also continue to drive passing rent and ERV growth further through asset management initiatives
Leasing activity during the Quarter comprised the completion of two rent reviews at an average 31% increase in annual rent, nine lease renewals and regears in aggregate 11% ahead of ERV and 13% ahead of the previous rent, and letting six vacant units
Valuations growing across the Company’s c.£594m portfolio, with a 1.2% uptick on a like-for-like basis
Q4 net asset value (“NAV”) total return per share of 3.4%
NAV per share grew by 1.8% to 96.1p (31 Dec 2024: 94.4p) with a NAV of £423.5m (31 Dec 2024: £416.1m)
The value of the Company’s portfolio of 151 assets at the Quarter end was £594.4m (31 Dec 2024: £586.4m), a like-for-like increase of 1.2% during the Quarter, net of £0.8m of capital expenditure. Benefitting from a diversified portfolio, during FY25, the Company has seen a like-for-like portfolio valuation increase of 2.2%
Savers might be surprised at how much they need in their pension pot to fund this.
Figures we plugged into MoneyHelper’s annuity comparison tool showed a 65-year-old would need a pension pot of around £545,000, if they wanted to purchase an annuity that paid out enough each year to fund a comfortable retirement (i.e. just over £43,000 per year).
The amount will vary depending on your health and the sort of annuity product you want to buy, as well as market annuity rates at the point of purchase.
The quote we generated assumes the 65-year-old is in good health, and wants to purchase a single-life level annuity.
Discover the safe, simple way to lock insteady monthly dividends up to 10% right now!
Dear Reader,
You’ve no doubt heard pundit after pundit say that you need at least a million dollars to retire well.
Heck, we’ve all heard it so often, I bet it’s the first number most people think of when someone says “retirement savings”!
Let me explain why this endlessly repeated fallacy is dead wrong. You’ll actually need a lot less than that.
I’m talking about just $600,000. And in some parts of the country you could easily do it on less: a fully paid-for retirement for just $500,000.
Got more? Great. I’ll show you how you can retire filthy rich on your current stake.
I know that sounds ridiculous in these inflationary times, but stick with me for a few moments and I’ll walk you straight through it.
The key is my “8% Monthly Payer Portfolio,” which lets you live on dividends alone—without selling a single stock to generate extra cash.
And you’ll get paid the same big dividends every month of the year – so that your income and expenses will once again be lined up!
This approach is a must if you want to quickly and safely grow your wealth and safeguard your nest egg through the next market correction, too!
This isn’t just a dividend play, either: this proven strategy also positions you to benefit from 10%+ yearly price upside potential, in addition to your monthly dividends.
That’s the Power of Monthly Dividends
We’ll talk more about that price upside shortly. First, let’s set up a smooth income stream that rolls in every month, not every quarter like the dividends you get from most blue-chip stocks.
You probably know that it’s a pain to deal with payouts that roll in quarterly when our bills roll in monthly.
But convenience is far from the only benefit you get with monthly dividends. They also give you your cash faster—so you can reinvest it faster if you don’t need income from your portfolio right away.
More on that a little further on. First I want to show you…
How Not to Build a Solid Monthly Income Stream
When it comes to dividend investing, many “first-level” investors take themselves out of the game right off the hop. That’s because they head straight to the list of Dividend Aristocrats—the S&P 500 companies that have hiked their payouts for 25 years or more.
That kind of dividend growth is impressive. But here’s the problem: these folks are forgetting that companies don’t need a high dividend yield to join this club—and without a high, safe payout, you can forget about generating a livable income stream on any reasonably sized nest egg.
Worse, you could be forced to sell stocks in retirement—maybe even into the kind of plunges we saw in March 2020 or throughout 2022—just to make ends meet.
That’s a nightmare for any retiree, and leaning too hard on the so-called Aristocrats can easily make it a reality: the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which holds all 69 Aristocrats, still yields just 2% as I write this.
Solid Monthly Payers Are Rare Birds …
You can certainly build your own monthly income portfolio, and the advantage of doing so is obvious: you can target companies that pay more than your average Aristocrat’s paltry payout.
Trouble is, only a handful of regular stocks pay in any frequency other than quarterly, so we’ll have to patch together different payout schedules to make it happen.
To do that, let’s cherry-pick a combo of well-known payers and payout schedules that line up. Here’s an “instant” 6-stock monthly dividend portfolio that fits the bill:
Procter & Gamble (PG) and AbbVie (ABBV) with dividend payments in February, May, August and November.
Target (TGT) and Chevron (CVX), with payments in March, June, September and December.
Sysco (SYY) and Wal-Mart Stores (WMT), with payments in January, April, July and October.
Here’s what $600,000 evenly split across these six stocks would net you in dividend payouts over the first six months of the calendar year, based on current yields and rates:
You can see the consistency starting to show up here, with payouts coming your way every single month, but they still vary widely—sometimes by $1,025 a month !
It’s pretty tough to manage your payments, savings and other needs on a lumpy cash flow like that.
And the bigger problem is that we’re pulling in $17,300 in yearly income on a $600,000 nest egg. That’s not nearly enough for us to reach our ultimate goal of retiring on dividends alone, without having to sell a single stock in retirement.
We need to do better.
Which brings me to…
Your Best Move Now: 8%+ Dividends AND Monthly Payouts
This is where my “8% Monthly Payer Portfolio” comes in. With just $600,000 invested, it’ll hand you a rock-solid $48,000-a-year income stream. That could be enough to see many folks into retirement.
The best part is you won’t have to go back to “lumpy” quarterly payouts to do it !
Of all the income machines in this unique portfolio, nearly half pay dividends monthly, so you can look forward to the steady drip of income, month in and month out from these plays.
That’s How This Grandma Makes
$387,000 Last Forever
A while back, I was chatting with a reader of mine who manages money for a select group of clients. He’d been using my Monthly Payer Portfolio to make a client’s modest savings – a nice grandmother who came to him with $387,000 – last longer than she ever dreamed:
“She brought me $387,000,” he said. “And wants to take out $3,000 per month for 10 years.”
The result? The last time I’d spoken with him, it had been over seven years since she started her $3,000 per month dividend gravy train. In that time, she’d taken out a fat $252,000 in spending money.
And that nest egg ? Well, it’s going strong. Last time I checked in with this reader, she was still sitting on more than $258,000 after seven years and $252,000 worth of withdrawals.
Grandma’s Monthly Dividend Gravy Train
Her investments pay fat dividend checks that show up about every 30 days, neatly coinciding with her modest living expenses. And the many monthly dividend payers she bought dish income that adds up to 5%, 7% and even 8% or more per year.
There’s no work to it; these high-income investments provide a “dividend pension” every month.
I’m ready to give you everything you need to know about this life-changing portfolio now. Let’s talk about Grandma’s secret – her high-yielding monthly dividend superstars (which even have 10%+ price upside to boot!)
Monthly Dividend Superstars:
8% Annual Yields With
10%+ Price Upside, Too
Most investors with $600,000 in their portfolios think they don’t have enough money to retire on.
They do – they just need to do two things with their “buy and hope” portfolios to turn them into $4,000+ monthly income streams:
Sell everything – including the 2%, 3% and even 4% payers that simply don’t yield enough to matter. And,
Buy my favorite monthly dividend payers.
The result? More than $4,000 in monthly income (from an average annual yield just over 8%, paid about every 30 days). With upside on your initial $600,000 to boot!
And this strategy isn’t capped at $600,000. If you’ve saved a million (or even two), you can just buy more of these elite monthly payers and boost your passive income to $6,660 or even $13,320 per month.
Though if you’re a billionaire, sorry, you are out of luck. These Goldilocks payers won’t be able to absorb all of your cash. With total market caps around $1 billion or $2 billion, these vehicles are too small for institutional money.
Which is perfect for humble contrarians like you and me. This ceiling has created inefficiencies that we can take advantage of. After all, in a completely efficient market, we’d have to make a choice between dividends and upside. Here, though, we get both.
Inefficient Markets Help Us
Bank $100,000 Annually (per Million)
Fortunately for you and me, the financial markets aren’t 100% efficient. And some corners are even less mature and less combed through than others.
These corners provide us contrarians with stable income opportunities that are both safe and lucrative.
There are anomalies in high yield. In an efficient market, you wouldn’t expect funds that pay big dividends today to also put up solid price gains, too.
We’re taught that it’s an either/or relationship between yield and upside – we can either collect dividends today or enjoy upside tomorrow, but not both.
But that’s simply not true in real life. Otherwise, why would these monthly payers put up serious annualized returns in the last 10 years while boasting outsized dividend yields?
For example, take a look at these 5 incredible funds that pay monthly and soar:
This is the key to a true “8% Monthly Payer Portfolio” – banking enough yields to live on while steadily growing your capital. It’s literally the difference between dying broke and never running out of money!
But I’m not suggesting you run out and buy these funds.
Some have been on my watchlist and in our premium portfolios over the years, but I mention them only as examples of the potential ahead.
My name is Brett Owens and I’m an unabashed dividend investor. Ever since my days at Cornell University and all through my years as a startup founder in Silicon Valley, I’ve hunted down safe, stable, meaningful yields.
How compounding works and why it’s your most powerful wealth-building tool Story by Becky Wilding
The Independent
Compounding is the secret to how the rich get richer. Or, as Benjamin Franklin put it, “Money makes money. And money that makes money, makes money.”
What is compounding?
Compounding is easiest to explain through an example:
If you leave £10,000 in a savings account for one year at an interest rate of 5 per cent, you’ll earn £500 in interest. Now you have £10,500.
Keep this £10,500 in the same savings account for another year, and this time you’d earn £525 in interest. Keep doing the same, and by year 16, you’d be earning over £1,000 a year in interest. By year 30, you’d earning over £2,000 a year.
At this point, your £10,000 savings would have turned into £40,000 – without you paying in a penny more: The earned money itself begins to earn money.
This is how compounding works: Leave your money untouched, allow it to generate a return, and then generate a return on that initial return.
How powerful is compounding?
Albert Einstein is attributed to the quote of compound interest being “the eighth wonder of the world” – so, pretty powerful. But again, it’s easiest to understand the power of compounding using examples with real monetary amounts.
In your sixth year of saving, you would earn ten times more interest than your first year.
During year one, you’d pay in £2,400 in total and your annual interest would be £70. But in year six, while you’d still pay in £2,400 in total, your interest that year would be £760.
By year 15, your savings would grow more through interest than through your actual payments. You’d still be paying in £2,400 a year, but your interest that year would be £2,500 – and it would continue to grow in every subsequent year, as the chart below from helpfulcaculators.com shows.
Compounding shown visually, via helpfulcalculators.com (helpfulcalculators.com)
After 26 years, you would have doubled your money with the interest accrued.
You would have paid in £62,400 in total, and you would have earned interest of £64,300. This gives you a total of £126,700.
Consistency, and time, are the key factors at play – along with a constant rate of interest in this example, which is of course one factor out of your control.
How does compounding work with investments?
When we’re talking about compounding in the context of savings (or interest-bearing securities), as in the example above, we specifically mean compound interest. If we’re talking about investments, we’re discussing compound returns.
The same principle applies: if you reinvest your returns (e.g. capital gains or dividend payments), your subsequent returns will be based on a higher capital amount. For example, if you invested £10,000 and made gains of £700 in year one, you’d have £10,700 to invest in year two.
Compound returns are not so easy to forecast. A seven per cent gain in year one does not ensure a seven per cent gain in year two. Your actual gain could be higher, lower, or even negative.
However, an investor pursuing compound returns would have little concern for a negative return in year two. This is a long-term investment strategy, and occasional losses are to be expected in any such strategy; these tend to be balanced out by better returns in other years.
Which is better: saving or investing?
Having read the examples above, you might be drawn to the certainty of savings over the unpredictability of investments. However, you should note that our savings example uses an interest rate of five per cent, for simplicity.
But it would be very unusual for cash savings accounts to offer this rate year after year for thirty years. Interest rates fluctuate and can sink to near zero for years at a time.
Inflation would also diminish the buying power of your savings each year. Just to keep pace with inflation, you would need to double your money every 30 years.
Historically, your best chance to beat inflation has been by investing in equities. This asset class does not produce a consistent annual return, but over long periods, is expected to deliver average returns of seven to ten per cent. That means it’s possible to achieve a real return (in other words, adjusting for inflation) of around 5 per cent.
How can you take advantage of compounding?
Luckily, taking advantage of compounding is not hard work. The main requirement is patience…and actually starting. There are a few other pointers you should consider:
Start as soon as you can
Invest in a fund or diverse portfolio of equities
Maintain regular payments into your portfolio
Stay invested for many years, avoiding withdrawals
Regularly review your portfolio performance
And remember – you don’t have to start with huge amounts either, you just have to start.
The Independent
