Shares will be running a series of Christmas features explaining the top 10 golden rules of investment
Rule number 3: Minimise ongoing costs
Even if over the next three decades you are able to successfully replicate the historic 30-year return of the FTSE All-Share and patiently reinvest dividends to unlock the power of compounding, you must keep a close eye on costs, so you retain as much of the upside as possible. Ongoing charges compound too, just like reinvested dividends, as our example shows.
Our lovely £20,767 pot built up with each £1,000 put into the UK equity market with dividends reinvested over 30 years is slashed by 34% to £13,789 if you knock off the 1.5% annual pension charge that is still common with some occupational schemes.
Rule number 4: Seek out firms with a competitive advantage
If a company is a price giver rather than a price taker it has a far greater chance of being the master of its own destiny. It is therefore no coincidence that those firms with pricing power are typically able to turn healthy profits into copious cashflow and can often point to a long history of progressive dividend payments (see rule number 5).
A company’s ability to set prices is determined by its competitive position, which can be usefully appraised by considering the five competitive forces identified by Harvard Business School professor Michael Porter in his seminal paper How Competitive Forces Shape Strategy, published in 1979 in the Harvard Business Review.
Prime pick: Reed Elsevier (REL) 877.0p
Last month’s (23 Apr) first-quarter results suggest it is all matter of ‘steady as she goes’ at academic publishing giant Reed Elsevier (REL). The FTSE 100 company’s specialist content and the long history of its brands mean customers are reluctant, or even unable, to change supplier and human inertia is a very powerful force to have on your side.
While there is a lot of talk about the threat to Reed Elsevier’s model posed by open-source publishers it is hard to see this becoming too serious in the near term since the firm receives some 850,000 article submissions each year. Such scale makes it very profitable and the core Science Technical & Medical division generated a 38.8% margin in 2013. The unit’s lofty return on sales also partly results from the 72% portion of revenues that are generated from electronic products. Offerings such as the SciVerse web research platform are particularly popular. Reed Elsevier’s long track record of cash-generative organic growth also points the way toward a steady stream of progressive dividend payments in the future.