Can investing in the secure sharemarket returns of “boring” stocks make you rich?
Many novice sharemarket investors are filled with dreams of generating substantial wealth in a short timeframe. In other words, everyone is looking for a way to get rich quick, and have share portfolios that are tailored to suit this goal.
But rather than adopting a high risk/high reward strategy and hoping to strike it lucky, there are many benefits to choosing shares for the long-term. In times of volatility and uncertainty, these shares offer a secure investment, stable returns and solid growth.
So what are some of the benefits of "boring" shares and how can you invest for the long-term?
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Share market volatility
Ever since the Global Financial Crisis of 2008, when Australian shares plummeted by more than 50%, “volatility” has been the word on everyone’s lips. Investors who suffered substantial losses between late 2007 to early 2009 know just how financially devastating a sharemarket crash can be. This means investors and market analysts alike are always trying to predict when the next big fall will come.
In 2016, when the All Ordinaries endured a horror start to the year and slumped 7% in the first two weeks of January, global bank RBS warned that share markets around the world might fall by up to 20% over the course of the year. In such volatile and unpredictable times, so-called “boring” shares can offer a safe and secure investment option.
The benefits of “boring” shares
You don’t need a risky investment plan to generate wealth from shares. In fact, while shares can provide a great long-term investment strategy, if you’re looking to make a quick buck then investing in shares can be very risky.
Despite this risk, it can be very tempting to take a punt on speculative companies. These are companies that do not have a long, well-established history of providing stable returns to investors. They’re also typically located outside the list of the top 100 companies in Australia.
While these types of companies may theoretically provide the potential for larger returns, there’s also the risk of incurring substantial losses when you invest in them. In most cases, investing in speculative shares is best left to experienced traders who know what they’re doing and are willing to accept the increased level of risk.
If you’re new to share trading and investing, consider investing in “boring” shares from some of Australia’s blue-chip companies. These are companies included in the S&P/ASX 50, a list of Australia’s top 50 companies, and they tend to have a long history of providing steady returns with minimal risk.
The benefits of dividends
It’s also worth remembering that there are two ways to earn money from shares. Not only can you benefit from capital growth in the value of shares over time, but you can also earn an income from dividends.
A dividend is a company’s way of distributing its profits to shareholders. Many companies listed on the ASX pay dividends twice a year, including a smaller “interim” dividend and a larger “final” dividend. However, not all companies pay dividends to shareholders and will instead invest all of their profits back into the company.
Dividends tend to be paid by larger, more established companies on the ASX and you can use them to provide a regular, ongoing source of income. This offers you security and stability for the future, while at the same time giving you a chance to benefit from the company’s long-term capital growth.
What are some “boring” shares?
The S&P/ASX 50 is a list of Australia’s top 50 companies. It includes companies with a history of providing steady returns and minimal volatility to investors. These companies are spread across a wide range of market sectors, including.
In the banking and financial services
Companies in the financial sector have a history of providing large dividends. This includes companies such as AMP and the Big Four banks: CommBank, Westpac, ANZ and NAB.
In the resources sector
As mining is a cyclical industry, resources companies have the potential to provide high capital growth but also have a reputation for underperforming when the mining industry experiences a downturn. Having said that, companies such as BHP Billiton, Woodside Petroleum and Rio Tinto all feature in the S&P/ASX 50.
In the retailer sector
Retailers tend to offer medium-sized dividends to shareholders, and Woolworths and Wesfarmers (owner of Coles) are popular choices with investors.
Other companies that feature in the S&P/ASX 50 include:
- Telecommunications giant Telstra
- Drinks company Coca-Cola Amatil
- Retail giant Westfield Group
- Australia’s largest airline, Qantas
Other long-term investment tips
Make a plan
- Before you start buying or selling shares, consider exactly what you want to achieve with your share portfolio and in what timeframe. Once you have a plan in place you can then choose your investments accordingly.
- Share markets fluctuate all the time – look at historical graphs charting the performance of the ASX for proof of this – so don’t panic at the first sign of share prices heading south. Stick to your plan and ride out any dips or down periods.
Consider your investment goals
- Are you looking for shares to provide capital growth or to generate income? Smaller companies tend to focus more on growth and therefore reinvest profits into their business, while larger companies tend to pay dividends to their shareholders.
Don’t forget about dividends
- Dividends can provide a stable source of ongoing income during uncertain financial times. Look at companies with a history of paying high dividends to shareholders to see whether they could provide an attractive investment option for you.
Choose companies wisely
- Blue-chip stocks, also known as large-cap companies, tend to offer secure, stable returns and a minimal level of risk. Smaller companies outside the top 50 or 100 companies on the ASX may provide larger growth potential, but they also come with a much higher level of risk attached.
Research before you buy
- Looking at a company’s annual reports, earnings and historical performance will help you form a clearer picture of whether it is a sound investment. If you’re using an online share trading platform, you may also be able to access research reports and buy or sell recommendations for various companies.
Know what long-term means
- In order to ride out any periods of market volatility and enjoy the maximum returns, you typically need to look at an investment time frame of 7 to 10 years when choosing shares.
Consider other investment options
- Depending on your investment goals and appetite for risk, you may also want to consider other options, such as exchange traded funds (ETFs). ETFs are bought and sold on the ASX just like shares, but they allow you to gain exposure to a share index or other group of underlying assets.