The easiest way to become a millionaire

And no, it's not a lottery ticket

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published January 7, 2013 9:31 am AEDT

You can get lucky and pick a huge winner, or you can use this time-tested investing strategy.

There are some people who have made good money finding shares like CSL Limited (ASX: CSL) or Oil Search Limited (ASX: OSH) when they were tiny companies, then staying with them until their market cap is well over $9 billion.

But finding such future stock market stars isn't easy. The odds are very much against you, as most small caps never make it to the big league.

We'd like to share with you a simple, easy strategy for becoming wealthy — and then give you share ideas based on it. Although it's simple, it takes discipline to adhere to the rules. But if you follow this advice, you'll be well on your way to a million-dollar portfolio.

Keep it simple

One of the biggest mistakes investors make is complicating the process. Academics have proven that more information doesn't necessarily lead to better decisions — but it does lead to overconfidence. Even worse, the more time and effort you put into researching, analysing, and deciding whether to buy a share, the more likely you are to buy it — even if it's a horrible company after all.

Overconfidence and over-commitment are counterproductive in investing — and it's why keeping your investment criteria simple and easy can help you avoid falling into these traps.

What sort of criteria are we suggesting? Just two steps:

1. Find strong, long-term dividend-paying companies

Dividends are the surest gains you can find in any market environment. No matter what the capital gain or loss is for the market, when you factor in dividends, the returns can look quite different.

It's best to look for companies with a long history of paying out dividends, and a long history of not cutting dividends.

You should find companies with predictable, sufficient free cash flow, so you can be reasonably sure these dividends will continue to be paid.

And now for the hard part…

2. Hold forever

The strongest of dividend-paying companies raise their dividend over time. So when you hold one for long enough, you eventually reach a point where you are making more money annually in dividends than you initially invested in the company.

This is hastened when you reinvest your dividends back into the company, with each dividend purchasing even more shares of the company, meaning even more payout at the next interim or final dividend.

So long as the business continues to perform, and the company continues to maintain or raise its payouts, the simplest and most lucrative approach is to remain an owner and collect your dividends.

Implementing this strategy

The ASX 200 has many steady dividend-paying companies. For example…

Woolworths Limited (ASX: WOW), Coca-Cola Amatil Ltd (ASX: CCL), Washington H. Soul Pattinson (ASX: SOL) – which hasn't missed a dividend since 1902, and ARB Corporation (ASX: ARP).

We've seen more than a fair share of dividend blowups over the past year, but if you look for a company with enduring demand, and sufficient free cash flow — you are following the easiest way to become a millionaire.

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Motley Fool writer/analyst Mike King owns shares in CSL & Woolworths. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article originally appeared on Fool.com. It has been updated by Mike King.

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