If I wanted to build more wealth over the long term, one activity I think could help me is investing in income shares. I do not even need big money to begin. I could start building a portfolio of income shares with a relatively modest amount.
As an example, if I had a spare £300 today, here is how I might try to turn it into £500 using such an approach.
How can income shares increase my wealth?
If I own income shares, I would be entitled to any dividends paid by the company. A dividend is a payment a business makes to shareholders as a reward for owning the shares.
A company that is consistently profitable would find it easier to make such payments than one that keeps losing money. But there is no obligation for firms to pay dividends, even if business is good or they have paid out regularly in the past. They may decide to invest profits back into the business.
If I bought income shares and did receive a dividend from them, over time that money could add up. I could choose to compound the dividends, which means reinvesting them in more shares. Doing that could help me grow my wealth quicker. If I invested £300 in shares with an average 5% dividend yield, for example, compounding could mean that within 11 years I would own shares worth £500.
The above example presumes that share prices and dividends remain constant, which in practice may not happen. But it demonstrates how, simply by buying and holding the right income shares, compounding could help me to grow my wealth.
Finding shares to buy
But if I wanted to start building a portfolio of income shares, how might I go about it?
As dividends are basically a way of distributing profits among shareholders, I would want to find companies that are profitable. But with an eye on the long term, I would focus on hunting for companies that are not only profitable today but can hopefully remain so far into the future.
To do that, I would look for a competitive advantage that might help a company to keep making profits. Consider AstraZeneca as an example. It owns the patent on a variety of blockbuster drugs. That means it can produce them and effectively face no competition. Even if prices are regulated, such a position ought to give the business a competitive advantage.
Does that make it a good income investment for my portfolio though?
Currently, the AstraZeneca dividend yield is 2%. That is far below the 5% yield I used in my example above. A market capitalisation of over £170bn looks high to me for a firm that made a profit last year of around £100m. So although AstraZeneca as a business has attributes I like, at its current share price I would not buy it for my portfolio.
As a long-term investor, I am in no hurry. If I keep searching, I would expect to find some promising income shares that would offer me exposure to excellent businesses at an attractive price.
Those are the sorts of income shares I would use to build my portfolio — and hopefully my wealth.
The post Income shares could help me turn £300 into £500. Here’s how appeared first on The Motley Fool UK.
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C Ruane 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.