Is it possible to become a millionaire by investing only $500 a month? The short answer is yes, assuming the following scenario as an example. $500 a month (or $6,000 a year) invested for a rate of return of 10% will take a little over 30 years to hit $1 million. Achieving a higher rate of return and investing more than $6,000 a year can help you become a millionaire sooner, but it won’t be easy.
Also, a potential problem is that $1,000,000 30 years later will be worth much less than $1,000,000 today due to inflation. So, it may be better to consider how much income your investment portfolio can make you. You should target that income to cover the expenses that are associated with your desired lifestyle.
The thing about investing is that we must make estimations or projections about the business. There’s no way around it because no one has a crystal ball to foretell the future. The further out into the future, the more unreliable our educated guesses are.
That said, stocks are driven by the underlying businesses, and it takes time to show the effect on the stock unless the stock valuation is out of whack. This is why I usually target to own stocks for at least the next three to five years. When I mention the 12-month analyst consensus price target, those are obviously projections, too. To me, they are a gauge of if a stock might be cheap and a potential buy.
Since the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, generated total returns of approximately 8.1% per year over the last decade, a 10% rate of return is a decent target.
The idea is to build a diversified portfolio of solid stocks over time with savings of at least $500/month. Here’s an example of a stock that I think could deliver total returns of about 10% per year over the next five years, especially if it ends up taking a dive close to $50 per share.
Fortis (TSX:FTS) is a blue-chip stock that Canadians can buy and hold and sleep well at night with. In the long run, investors can expect the defensive utility stock to increase its earnings and dividend. It has corrected over 10% from its 2023 high. And it’s a decent buy here at writing at $53.52 per share with a dividend yield of 4.4%.
The regulated utility has a diversified portfolio comprising 10 utilities that primarily have transmission and distribution assets, which provide essential utility services, resulting in a resilient business even during bad economic times like a recession.
Higher interest rates have been weighing on the stock. At the recent quotation, it trades at a price-to-earnings ratio of approximately 17.3 — a 10% discount from its long-term normal valuation, which is a premium valuation driven by the predictability and stability of the business.
Fortis stock has increased its dividend for half a century — one of the longest streaks for TSX stocks! Since it can grow its earnings, and it maintains a sustainable payout ratio, investors can continue to expect dividend increases of 4-6% per year over the next few years.
If you’re still not sure about Fortis stock, you can wait to see if it’ll pull back some more. Fortis is reporting its earnings results very soon anyway. (It’s expected to report on Friday.) Should the stock hit close to $50, I’d certainly be interested.