Stop saving, start buying dividend stocks: 1 simple step to make a million

Here's how you could improve your chances of generating a seven-figure portfolio.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Making a million is never going to be a quick or easy task. However, the chances of you achieving that goal could be increased by making one simple decision when it comes to investing your hard-earned capital.

While holding it as cash may seem to be a good idea due to its low risks, in the long run it can fail to improve your spending power. By contrast, dividend shares have historically offered significantly higher returns which may continue in the coming years.

Therefore, now could be the right time to pivot from cash to dividend stocks. It may not make you a million in the short run, but could provide a boost to your chances of achieving that ambition in the long run.

Low cash returns

Interest rates may be at low levels at the present time, but cash has a history of disappointment when it comes to returns. Certainly, interest rates have been higher in the past. But cash has failed to offer high returns due in part to its lack of risk compared to other assets. In other words, for an asset to offer higher rewards, it must come with a higher degree of risk. As such, the low-risk nature of cash means that its rewards are unlikely to be attractive on a relative basis – even in the long run.

Looking ahead, interest rates could stay at relatively low levels in the coming years. There are concerns held by many policymakers regarding the growth prospects for the world economy. Political risks in the US, China and Europe may mean that a loose monetary policy continues. This may mean that capital held as cash fails to offer a substantial return after inflation is factored in.

Dividend prospects

By contrast, investing in dividend shares has historically proved to be a sound move. The stock market has a solid track record of high-single digit total returns that are likely to continue in future. Even after a decade-long bull market there are high yields and low valuations on offer across major stock indices. This suggests that they have the potential to post improving total returns.

Although growth stocks could be attractive purchases, the reinvestment of dividends received has contributed a large portion of historic total returns for indexes such as the S&P 500 and FTSE 100. With the outlook for the world economy being unclear, dividend shares that offer a degree of defensive characteristics could prove to be popular among investors. They may offer favourable risk/reward ratios compared to growth stocks, as well as relative to other asset classes.

Time to buy?

Switching from cash to dividend stocks may seem like a risky move. In the short run, this could be the case. Share prices could experience a difficult 2020 as global economic risks are high. However, in the long run dividend shares could offer higher returns than cash. They could, therefore, increase your chances of making a million.

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Multiracial happy young people stacking hands outside - University students hugging in college campus - Youth community concept with guys and girls standing together supporting each other.
Share Market News

Here's how the ASX 200 market sectors stacked up last week

The worst-performing market sector of 2024 was the best performer in the first week of 2025.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A bland looking man in a brown suit opens his jacket to reveal a red and gold superhero dollar symbol on his chest.
Broker Notes

These ASX 200 shares could rise 20% and 50% in 2025

Analysts are tipping these shares to beat the market this year. Let's see why.

Read more »

Girls at a party are surrounded by gold streamers, a golden ball and are having a fun time.
Best Shares

New Year's resolution! Top ASX shares for beginner investors in 2025

Planning to bolster your financial future this year?

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Share Gainers

Why Cettire, Gold Road, Imugene, and Paladin Energy shares are racing higher

These shares are ending the week with a bang. But why? Let's find out.

Read more »

A man looks down with fright as he falls towards the ground.
Share Fallers

Why Appen, Brainchip, Liontown, and Mesoblast shares are falling today

These shares are ending the week in the red. But why?

Read more »

a man in a business suite throws his arms open wide above his head and raises his face with his mouth open in celebration in front of a background of an illuminated board tracking stock market movements.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares.

Read more »

A woman blows what looks like colourful dust at the camera, indicating a positive or magic situation.
Share Market News

Why did the NAB share price jump 21% in 2024?

It was a good year for this big four bank. Let's see what happened over the 12 months.

Read more »