According to AJ Bell, all of the top 10 stocks owned by ISA millionaires on its platform are members of the FTSE 100. And most of them are dividend stocks.
Shell, Lloyds Banking Group, Aviva, and National Grid all make the list. But they’re not the stocks I’d choose to try and build wealth if I were starting out today.
Growth vs income
For the vast majority of people, building a £1,000,000 investment portfolio’s going to take time. That means it’s important to identify companies that have great long-term prospects.
I’m not saying Lloyds and National Grid are going to do badly over the next 20 or 30 years. But when I think about which stocks will be worth more in the future, these aren’t the names that come to mind.
Over time, what makes the value of a stock go up is the underlying business finding ways to increase its earnings. And that’s difficult to do for a company that distributes a lot of its income to shareholders.
With a couple of exceptions, I’d focus on the companies that aim to reinvest the cash they generate to grow future profits. That’s where I think the best chance of reaching a million comes from.
A high-performing conglomerate
Halma’s (LSE:HLMA) a great example of the kind of stock I have in mind. The company does pay a dividend, but this only accounts for around a third of the firm’s net income.
Meanwhile, the business has been investing for growth. And over the last 10 years, revenues have increased by 180% a year and earnings per share are up 154%.
During this time, the Halma share price has gone from £6.09 to £25.18 – a 313% increase. That’s enough to turn a £1,000 investment a decade ago into £4,134 today.
The company’s shares going up faster than its earnings makes it more expensive on a price-to-earnings (P/E) basis than it used to be. And that’s a risk that often comes with investing in growth stocks.
Compounding
Halma’s an industrial technology conglomerate. The key to its past growth has been a combination of adding new businesses to its organisation, as well as helping them grow and operate more efficiently.
Opportunities to grow by acquisition can become more limited as a company gets bigger. This has been true of the likes of AMETEK, Dover, and Illinois Tool Works.
Halma though is a lot smaller than any of these companies, which makes me think its size isn’t going to be an issue for some time. That’s why I’d back the company to keep doing what it’s been doing.
With revenues currently growing at 10%, this would seem to be the case so far. And if it can keep doing this, I think it will more than justify its current share price over the long term.
Aiming for a big payday
Past performance isn’t a guarantee of future returns. But I think Halma has a business model and an approach that’s going to prove durable for some time.
A dividend yield below 1% might not make it the investment of choice for ISA millionaires. But it’s the stock I’d choose to try and get to that level.
This post was originally published on Motley Fool
