While obtaining a 10% annual return on shares may seem rather unlikely, the reality is that it is very achievable for even the most time-poor and inexperienced investors. In fact, in the last 40 years the S&P 500 has recorded annualised capital growth of 8.4%. It has risen from 98 points in 1977 to the current price level of around 2470. Therefore, investing in a simple index tracker fund over a long period of time could deliver double-digit annual returns when dividends are included.
Beating the market
Of course, the return of the market is only a benchmark for investors. In many cases, the index is beaten, and this can lead to returns which are well in excess of 10% per annum. Recent research has shown that a focus on dividends could be one means of achieving this goal, since the majority of investment returns in the long run have tended to be generated from dividends and their subsequent reinvestment. Therefore, buying shares with high yields could be a sound means of boosting returns in order to beat the index.
Alongside this strategy could be another approach, whereby an investor focuses on dividend growth. With inflation expected to move higher on a global basis over the coming years, purchasing shares which are able to grow their shareholder payouts at a rapid rate may lead to even higher capital growth. That’s because investors may become more interested in such stocks, and increased demand may mean higher valuations can be commanded.
Clearly, a focus on stocks which offer high growth potential is another means of beating the index in order to generate 10%+ annual returns. With the global economy continuing to benefit from an accommodative monetary policy, cyclical stocks could be shrewd investments at the present time. They may offer index-beating performance in future, as could banking stocks which are continuing to recover from legacy issues caused by the financial crisis.
Clearly, though, buying high-growth stocks for the right prices would have been a shrewd move 40 years ago when the S&P 500 was about to generate 8.4% growth per annum for the next four decades. That same strategy could work just as effectively today, since there are still a number of stocks across the globe which may prove to be undervalued at the present time. Buying them with the aim of obtaining an upward rerating and avoiding potentially overvalued stocks may be a means of obtaining double-digit returns.
While many investors aim for an annual total return of 7-8%, the reality is that a 10%+ return is very achievable. History shows even a tracker fund can deliver this level of performance in the long run, which means Foolish investors who focus on value, growth and income potential within their portfolios could do even better over a sustained period of time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.