How to Get an 8% Return on Your Investments

Many of you have sent me e-mails asking how you can get an annual return of 8% like the one I mentioned in the article How to become a millionaire while being a mileurist. Given that it is a topic of interest, today I am going to tell you one of the many ways to achieve this through your investments in the Stock Market.

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What are we talking about

First of all, I want to make clear from the beginning that when I talk about getting a certain return with your investments in the stock market I am referring to a long-term average annual return, since I can tell you with total certainty that you will not get the same profitability each and every year, either 8%, 6%, 10% or whatever.

As its name suggests, the average annual return is the average of the returns you get over several years. Imagine that you invest your money and you get the following results:

Year 1: 5% return
Year 2: 15% profitability
Year 3: profitability of 4%
Year 4: profitability of 9%

Calculated as a simple average, in this case you will have achieved an average annual return of 8% , although really in no year you will have obtained that exact 8%. Therefore, while obtaining the same profitability year after year is very unlikely if you invest in the stock market, getting a good average return for long periods of time is perfectly possible , and that is what I am going to talk about next.

Yes, I know what you are thinking, that it would be necessary to calculate the annual compound average profitability to refine the calculation. However, this is not the objective of the article, so I will talk about how to calculate this composite return another day, so today I keep the explanation as simple as possible.

Where your profitability comes from

If you read the article in which I present a business approach to your investments in the stock market , you will remember that when you buy shares you are not buying a piece of paper or a light on your screen, but what you are buying is really a part of a very real business. When you invest in companies listed on the Stock Exchange, your profitability can come basically in two ways:

1) Dividend yield

When a company earns money, it can leave those benefits within the company, becoming part of what is counted as reserves , or can distribute them among its shareholders, either in part or in its entirety. Well, when a business distributes profits among its owners, it does so through dividends . Therefore, dividends are the money that leaves the company to go to the pockets of its happy shareholders .

The dividend yield is , therefore, the return you get via dividends (eye with the phrase, to frame it ...). Imagine that you buy shares of the company Dividends, SA and you pay a price of € 10 per share. If throughout the year that company pays you dividends of € 0.30 per share, your dividend yield will be 3%, since that year your investment of € 10 is paying you € 0.30.

Notice that while the dividend that the company gives you that year is what it is, the lower the price you pay for your shares the greater the dividend yield you will get. This is the reason why deep crises are the best times to buy excellent businesses that continue paying their dividends, at outrageously low prices , which allows you to enjoy a high dividend yield from the start.

2) Profitability by appreciation

Another way to obtain profitability with your investments in the Stock Exchange is through the appreciation of the price of your shares . Imagine the shares of Dividends, SA that you bought in the previous section for € 10 each. If at the end of time those shares are quoted at € 15, it means that on paper you are getting a 50% return, since theoretically you are earning € 5 with each share compared to your initial investment of € 10. But beware, until you sell your shares you will not be able to turn that profitability on paper into a real return.

What real returns can you expect?

Looking at any study on the average dividend yield of the Ibex35, to give a very close example of the Spanish stock market, you can see that this is around 3.5% between 1995 and 2015. In other words, the dividend yield The average of the 35 largest companies in the Spanish stock market during the last 20 years has been approximately 3.5% per year.

In addition, by consulting any financial portal you can see the revaluation that the Ibex35 has experienced during those 20 years. In my case, after consulting the historical quotes in Inertia , my calculation shows an average annual revaluation of 4.87%. This means that the reference index of the Spanish Stock Exchange has increased its market value, its price, an average of 4.87% per annum over the last 20 years.

How to combine both returns

Now that you know the two main sources of profitability of your investments in the stock market and have in mind a global image of what is reasonable to expect, I am going to tell you a way to combine them to achieve that 8% average annual return, or more.

You have previously seen that the average annual dividend yield of the Ibex35 has been 3.5% during the last 20 years. Keep in mind that this average return includes both companies that pay large dividends and those that do not pay any (which does not necessarily mean that they are bad businesses, they simply do not pay dividends).

Therefore, if you focus on quality businesses that also pay solid and growing dividends year after year, even in times of crisis, you will be able to get significantly higher dividend yields from the start, since you will leave out the companies that do not. They pay and they throw the average down.

In fact, if you have enough patience to wait to invest only in the most suitable times, you should not be surprised to find fantastic businesses with an initial dividend yield of 5% - 6% , sometimes quite a bit more. In addition, although I've put the case of the Ibex35 as a reference, you do not need to focus only on this index, since you have at your disposal thousands of companies in stock exchanges around the world, which increases your chances of finding returns for even greater dividend.

Therefore, obtaining a dividend yield of 5% - 6%, you only need your shares to be revalued an average of 2% - 3% per year to achieve a return of 8%. As you can see, this is perfectly possible, since you have already seen that the average revaluation of the Ibex35 during the last 20 years has been 4.87%, and that taking into account both the companies that have gone up and those that have gone down, as well Imagine if you try to focus only on the highest quality . Mind you, I'm not saying it's easy, but neither is it impossible or within the reach of very few.

One last reflection

Many times they tell me that it is not possible to achieve annual returns of 5%, 8%, 10% or higher, especially in times of crisis like the current one. When someone tells me that, I understand that they are noticing that the stock market falls and falls without stopping, thinking that to make money it has to go up and up.

After reading today's article you will realize that the lower the price at which you buy your shares, the higher your initial dividend yield will be , as well as the potential revaluation , especially if you focus on high quality business. And, do you know when you can buy these fantastic businesses at very low prices? Exactly, in times of deep crisis.

As you go training in investments in the stock market, aspect in which I can tell you some things that I have been learning over time, you will stop worrying about whether your bank gives you 0.5% or 1% for your money and you will hope that Those excellent businesses that you like so much are sold at discount prices, allowing you to invest your money at a more than acceptable annual return .

Conclusion

How have you seen, get a return of 8% in each and every year with your investments in the stock market is almost impossible. However, getting an average return of 8% is perfectly within your reach if you properly form investments.

Today I have shown you one of the many ways that allow you to get a good return on your money and, without having planned it that way, I have once again shown you the essence of my investment philosophy: buy excellent business at sufficiently low prices to turn them into fantastic investments .

Do you focus your investments towards the dividend, the appreciation or a combination of the two? Shopping when the Stock Exchange goes up or when it goes down? What objective profitability do you propose?