Do you want to have $1 million in tax-free money, but you don’t have several thousand dollars to invest? You just need $100 a week to have $1 million in 20 years? You can build your million dollar portfolio through stock market investing, but you have to identify your risk appetite.
Diversifying your portfolio
Every strategy needs the right amount of diversification to reduce risk. Even Warren Buffett and Prem Watsa stick to a handful of stocks because it’s easier to track five stocks over 50.
When building your million-dollar portfolio, mix it with growth and dividend stocks across two to three different sectors. If you save $100 a week, you will contribute $5,200 a year and $124,800 in 23 years. If your overall portfolio’s average annual return is 15%, you can convert an annual $5,200 contribution to $1 million in 23 years.
The pandemic has created a situation of economic recession. Energy and real estate stocks that depend heavily on economic growth have dipped significantly. But the good thing about these stocks is they pay regular dividends. Their discounted prices have inflated their dividend yields and improved their valuations.
While these numbers may look attractive, it is a reward for taking risks as these companies’ cash flows and profitability would be hurt in the economic downturn.
The right way to go about with these stocks is to select the market leader that enjoys pricing power and has high-profit margins. Market share helps companies stay profitable even in the crisis. They might also absorb smaller competitors, if needed, to boost growth.
Enbridge and RioCan stocks
Enbridge (TSX:ENB)(NYSE:ENB) is the largest pipeline operator in North America and earns money by transmitting oil and natural gas. The oil crisis has reduced its stock price by 30% amid short-term challenges. Its second-quarter revenue fell 40% year-over-year (YoY) but its net income fell just 2.9% as its major expense of commodity cost varies as per revenue.
Enbridge has one advantage of predictable cash flows, which helps it prepare for a crisis well in advance. It has created $13.2 billion in liquidity to continue paying dividends and building pipelines. The reduced stock price has inflated its dividend yield to more than 8%. In its 25-year history, Enbridge has not cut dividends despite the crisis. At the most, it might stall its dividend growth for a year or two until oil demand recovers.
Similarly, RioCan REIT stock is trading at a 50% discount as the retail segment has been badly hit by the pandemic. Many small retailers might close down and default on rents. Hence, RioCan has set aside $19 million in provision for bad debts and rent abatements. However, the REIT can withstand this crisis and grow in the long term. The current stock price decline has increased its dividend yield to more than 10%.
If you invest $5,200 in each of the two stocks, you will lock in an annual dividend income of $965 for a lifetime. When the economy recovers, Enbridge and RioCan stocks will surge to their normal trading prices of $56 and $27, respectively. This represents an upside of 40% and 95%, respectively. So, your $10,400 investment will grow to $21,400.
Now that your dividend is secured, you can divide your $5,200 annual investment in Constellation Software and Descartes Systems. They have a resilient business model and have been growing for the last 10 years. Their stocks have surged at a compound annual growth rate (CAGR) of 30% and 20%, respectively, in the last five years. However, their large size would slow their growth. Even if their growth rate falls to 20% and 15%, respectively, your investment will be safe.
Once you have locked in your long-term strategy, you can take a year or two off and invest in trending stocks. For instance, the pandemic has created an e-commerce revolution, driving all related stocks like Cargojet and Shopify to record highs. Their stocks surged 80% and 140% year to date.
This can earn you some quick bonuses. If you had invested $2,600 in each of the two stocks at the start of the year, your $5,200 would have more than double to $10,800 by now.
The post Stock Market Investing: These 5 Stocks Can Earn You $1 Million appeared first on The Motley Fool Canada.
Fool contributor Puja Tayal has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends CARGOJET INC., Constellation Software, Enbridge, Shopify, and Shopify.
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