Last week saw a large number of broker notes hitting the wires once again. Three buy ratings that caught my eye are summarised below.

Here’s why brokers think investors ought to buy them next week:

Lendlease Group (ASX: LLC)

According to a note out of Credit Suisse, its analysts have retained their outperform rating and $13.31 on this global construction, property, and infrastructure company’s shares. Credit Suisse was pleased with Lendlease’s new strategy and expects it to result in predictable earnings. It feels this could support a re-rating in the future. Outside this, the broker sees Lendlease as a company that should benefit from the global urbanisation theme. I agree with the broker on this one and feel now would be a good time to invest.

National Australia Bank Ltd (ASX: NAB)

Analysts at UBS have retained their buy rating and $20.50 price target on this banking giant’s shares. This follows the announcement of the sale of its wealth business. According to the note, the broker believes this is a good move and expects it to boost its capital position to a level that gives it more than enough flexibility to deal with any increase in provisioning due to the pandemic. I think UBS is spot on and NAB would be a top option for investors.

NEXTDC Ltd (ASX: NXT)

A note out of Morgans reveals that its analysts have upgraded this data centre operator’s shares to an add rating with a $13.89 price target. It was pleased with NEXTDC’s full year results and believes they demonstrate the quality of its business model and earnings. Looking ahead, Morgans is forecasting strong earnings growth in the coming years thanks to the increasing demand for its services due to the cloud computing boom. I agree with Morgans and feel NEXTDC would be a great long term investment option.

More reading

• These were the best performing ASX 200 shares last week
• ASX 200 plunges 3.1%, Afterpay suffers
• 3 ASX growth shares to buy after the market selloff
• Are IOOF shares in the buy zone today after the MLC acquisition?
• Why I think the AMP share price is finally looking good enough to buy

Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. 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.

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At the small end of the Australian share market I believe there are a number of companies that have the potential to grow significantly in the future.

Four that I think are capable of this are listed below. Here’s why I think they should be on your watchlist:

Bigtincan Holdings Ltd (ASX: BTH)

Bigtincan is a $433 million provider of enterprise mobility software. This software allows sales and service organisations to increase sales win rates, reduce expenditures, and improve customer satisfaction through improved mobile worker productivity. It has been growing at a very strong rate, even during the pandemic. The good news is that it still has a long runway for growth. The company advised that the sales engagement platform market is expected to be worth $6 billion a year by 2021.

ELMO Software Ltd (ASX: ELO)

ELMO is a $465 million cloud-based human resources and payroll software company. It provides a unified platform to streamline processes such as employee administration, recruitment, on-boarding, remuneration, and payroll. It has a massive opportunity in both the ANZ and UK markets. Management estimates that the ANZ market is currently worth $2.4 billion per year and the UK market is worth $6.8 billion. The company also has $140 million on its balance sheet to deploy on acquisitions.

Mach7 Technologies Ltd (ASX: M7T)

Mach7 is a $232 million medical imaging data management solutions provider. Its enterprise imaging platform unlocks disparate archive silos, consolidates patient data, and simplifies sharing and access. This helps to inform diagnosis, reduce care delivery delays and costs, and improve patient outcomes. Mach7’s total addressable market is estimated to be worth US$2.75 billion per year.

Whispir (ASX: WSP)

Whispir is a $428 million software-as-a-service communications workflow platform provider. It provides an industry-leading software platform that allows governments and organisations to deliver actionable two-way interactions at scale using automated multi-channel communication workflows. Management estimates that the Workflow Communications platform as a Service market could reach US$8 billion per year by 2024.

More reading

• ASX All Technology Index swells with new additions
• 3 ASX growth shares to buy after the market selloff
• Why Brainchip and these ASX shares just surged to new highs
• 3 exciting ASX small caps to put on your watchlist
• Top ASX Stock Picks for September 2020

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Elmo Software, MACH7 FPO, and Whispir Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends BIGTINCAN FPO. The Motley Fool Australia owns shares of and has recommended BIGTINCAN FPO. The Motley Fool Australia has recommended Elmo Software, MACH7 FPO, and Whispir Ltd. 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.

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I think that almost anyone can build a $1 million portfolio by investing just $1,000 a month.

This isn’t a get-rick-quick idea. I’m not suggesting you’ll get a $1 million portfolio in two years by investing $500,000 a year. Time and compound interest are the main tools to make it happen.

With no compound interest it would take 20 years of saving $50,000 a year. That’s too much!

One of the quotes that sums up compound interest nicely is the one attributed to Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

Are bank accounts the best way to benefit from compound interest?

There are many different ways to generate interest from your money. You can earn interest from bonds, term deposits and savings accounts. Those are safe options, but when you factor in inflation they can be detrimental to growing your wealth. The official RBA interest rate is now just 0.25%, which won’t grow your wealth much at all.

You’re not going to get to $1 million unless you’re saving tons of cash.

I believe the best two types of assets for growing long-term wealth is property and businesses. If you buy the right property at the right time then it can produce big returns when using leverage – just look at the last decade. However, I don’t think taking on a large amount of debt makes sense in this environment.

Plus, when you think about headline property return figures, it doesn’t include the cost of renovations, the running costs or other factors like an empty property, non-paying tenants or damage.

I think that the share market is a great way to build wealth. Long-term returns tell us that the Australian and US share market have returned around 10% per annum over the decades. You can access broad markets with picks like Vanguard Australian Shares Index ETF (ASX: VAS), iShares S&P 500 ETF (ASX: IVV) or Vanguard MSCI Index International Shares ETF (ASX: VGS).

Don’t forget that Australians benefit from the Australian taxation system with franking credits to ensure that Aussies aren’t taxed twice on business profits paid out as a dividend. Franking credits usually aren’t included in Australian share market returns. 

Share returns for a $1 million portfolio

Let’s get back to the $1 million target. If your portfolio compounds at 10% a year and you invest $1,000 a month then it would take less than 24 years to get to $1 million. If you’re 25 you could become a millionaire before the age of 50. That sounds good to me.

The scenario I outlined above assumes you stick to investing $1,000 a month for the whole duration. Imagine if you started investing more when you turn 30 or 35. Perhaps you could start by investing $1,500 or $2,000 a month instead of $1,000. What if your portfolio could return 12% a year? In that case it would only take about 22 years.

What can you do to increase your returns from 10% a year to 12% a year? Well if you have a time machine handy you could go back and invest in shares like REA Group Limited (ASX: ALU), Pro Medicus Limited (ASX: PME) and CSL Limited (ASX: CSL).

What are some names for the future? I currently like growth names like Citadel Group Ltd (ASX: CGL), Pushpay Holdings Ltd (ASX: PPH) and Bubs Australia Ltd (ASX: BUB). Dividend picks with a decent yield I like are Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), MFF Capital Investments Ltd (ASX: MFF), and WAM Microcap Limited (ASX: WMI).

More reading

• 3 ASX shares every retiree should own
• How to earn a passive income of $50,000 with ASX dividend shares
• 3 ASX shares now trading at crazy cheap prices
• Why I would invest $100,000 across these fantastic ASX shares
• ASX All Technology Index swells with new additions

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO and CSL Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Pro Medicus Ltd., PUSHPAY FPO NZX, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended BUBS AUST FPO, Citadel Group Ltd, REA Group Limited, and Vanguard MSCI Index International Shares ETF. 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.

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Last week was a disappointing one for the S&P/ASX 200 Index (ASX: XJO). After a positive start, the benchmark index gave back all its gains and finished 2.4% lower than where it started at 5,925.5 points.

Another busy one is expected next week, but hopefully this time with a better outcome. Here are five things to watch:

ASX 200 futures pointing lower.

The ASX 200 index looks set to start the week with a day in the red. According to the latest SPI futures, the benchmark index is expected to fall 36 points on Monday morning. This follows a disappointing end to the week on Wall Street. The Dow Jones fell 0.55%, the S&P 500 dropped 0.8%, and the Nasdaq index continued its slide and sank 1.3%.

Energy producers on watch.

Concerns over demand for oil could mean that energy producers have a tough week. On Friday night Brent crude, the international benchmark, fell 3.2% to US$42.66 per barrel and West Texas Intermediate crude oil dropped 3.8% to US$39.77 per barrel. According to CNBC, Russian Energy Minister Alexander Novak believes global oil demand could fall by 9-10 million barrels per day this year due to the pandemic. This could be bad news for the likes of Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL).

Shares going ex-dividend.

A number of popular ASX shares are trading ex-dividend next week. On Monday stock exchange operator ASX Ltd (ASX: ASX) will go ex-dividend for its 122.5 cents per share dividend and healthcare company Sonic Healthcare Limited (ASX: SHL) for its 51 cents per share dividend. Also going ex-dividend next week are Brambles Limited (ASX: BXB) on Wednesday and biotech giant CSL Limited (ASX: CSL) on Thursday.

Dividends being paid.

Some shares are ahead of the group above and are scheduled to pay their dividends next week. These include dividend favourites such as auto parts retailer Bapcor Ltd (ASX: BAP), pizza chain operator Domino’s Pizza Enterprises Ltd (ASX: DMP), retail giant JB Hi-Fi Limited (ASX: JBH), and self-storage operator National Storage REIT (ASX: NSR).

DEXUS interested in AMP property find.

The DEXUS Property Group (ASX: DXS) share price will be one to watch next week amid speculation the property company is looking to steal the rights to a big Australian investment fund operated by AMP Limited (ASX: AMP). According to the AFR, Dexus is seeking to merge one of its own funds with the AMP Capital Diversified Property Fund. The latter invests on behalf of wholesale clients and is understood to have $4.5 billion in assets under management. This includes stakes in the Gold Coast’s Pacific Fair shopping centre, Macquarie Centre in Sydney, and the Quay Quarter in Sydney Harbour.

More reading

• These were the best performing ASX 200 shares last week
• ASX 200 plunges 3.1%, Afterpay suffers
• Top brokers are urging you to buy these ASX stocks in this market meltdown
• I love volatile ASX share market days like today
• Why the Transurban share price is outperforming today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia has recommended Domino’s Pizza Enterprises Limited and Sonic Healthcare Limited. 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.

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Looking to bolster your portfolio with ASX dividend shares? Then I would suggest you look at the ones listed below.

I think their generous yields make them great options in this low interest rate environment. Here’s why:

Aventus Group (ASX: AVN)

The first ASX dividend share I would suggest investors buy is Aventus. While you might think that retail property isn’t a great place to invest right now, it is worth noting that certain areas are performing better than others. Fortunately, Aventus is one of the industry’s positive performers thanks to its focus on large format retail parks. It owns a total of 20 centres across Australia, which are home to many of the largest retailers the country has to offer.

And thanks to its relatively high weighting towards every day needs via tenancies with ALDI, Bunnings, Officeworks, and The Good Guys, the company has been relatively unaffected by the pandemic. It recently released its full year results and revealed a 4.2% increase in funds from operations (FFO) to $100 million. It also reported solid rent collections of 87% through the COVID-19 period and a high occupancy rate of 98%. I expect this positive form to continue over the coming years and believe it is well-positioned to deliver another solid result in FY 2021. Based on the current Aventus share price, I estimate that it offers a 5.1% FY 2021 dividend yield.

Telstra Corporation Ltd (ASX: TLS)

Another ASX dividend share to consider buying is this telco giant. I think Telstra is one of the best dividend shares to buy on the ASX right now. This is due to its defensive qualities, positive long term outlook (post-pandemic), and its very attractive valuation.

And while there is speculation it will have to trim its dividend down to 12 cents per share in FY 2021, I’m optimistic this won’t be the case. But if it is, it is worth noting that its shares will still provide an attractive dividend yield. Based on the current Telstra share price, a 12 cents per share dividend will provide a fully franked 4.2% yield. And if it shifts its dividend policy to allow it to maintain its 16 cents per share dividend, it will offer a forward 5.6% yield. I think both make it worth considering.

More reading

• 2 ASX dividend shares with yields over 5% today
• 2 fantastic ASX 50 shares I would buy today
• 3 top ASX shares I would love to buy this September
• UBS picks the best and worst ASX stocks from the reporting season
• Should you buy Telstra and these beaten down ASX shares?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended AVENTUS RE UNIT. 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.

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Warren Buffett’s track record of generating high returns means that following his advice could be a sound means of improving your retirement prospects.

Certainly, there is a risk that a second stock market crash will occur in the coming months. However, through buying high-quality stocks at low prices, and focusing on the long run, you could generate impressive returns that bring forward your retirement date.

Investing in the stock market

Warren Buffett’s capital has always been focused on the stock market. Although he has held significant amounts of cash, this is to provide security and the liquidity required to buy more stocks, rather than to generate a high return.

As such, following his lead and using the stock market to build a retirement nest egg could be a sound move compared to purchasing other assets. Although other mainstream assets such as bonds and property may hold some appeal at the present time due to ongoing economic risks, the past performance of the stock market shows that a recovery is very likely. Therefore, it could produce significantly higher returns than other asset classes, and make a greater positive impact on your retirement plans.

Warren Buffett’s focus on quality at a low price

Warren Buffett has always sought to purchase high-quality businesses when they trade at low prices. For example, he has bought companies that have wide economic moats. This essentially means that they have a competitive advantage over the peers that enables them to generate higher levels of profitability. When purchased at an attractive price, such companies allow investors to obtain a relatively favourable risk/reward opportunity.

At the present time, many stocks are trading at low prices. In some cases, their low valuations may be deserved due to their difficult outlooks. However, in many cases, weak investor sentiment towards specific industries and sectors may provide buying opportunities for long-term investors. Undervalued stock may be able to deliver improving financial performances as the economic outlook strengthens, which could lead to impressive capital returns.

Short-term worries

The prospect of a second stock market crash is unlikely to worry long-term investors such as Warren Buffett. He has always been comfortable with the idea of short-term volatility in the stock market, since he has a long-term view of his holdings. This has enabled him to buy when the stock market’s outlook is very uncertain and stock prices are relatively low.

Since many investors who are seeking to build a retirement nest egg are likely to have a long time horizon, short-term downturns should not be a major concern. In fact, they could provide further buying opportunities that enable you to add stocks to your portfolio and further benefit from the stock market’s growth potential over the coming years.

More reading

• How to earn a passive income of $50,000 with ASX dividend shares
• 3 ASX shares now trading at crazy cheap prices
• Why I would invest $100,000 across these fantastic ASX shares
• There are 2 ways to spend your ASX dividends. Are you choosing the right one?
• These were the best performing ASX 200 shares last week

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.

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Wouldn’t it be nice to be paid $50,000 per year for doing nothing? Well, if you like the sound of that, then read on.

I believe the Australian share market is a great place to earn a passive income. This is because a large number of companies share their profits with shareholders by paying them dividends each year.

How can you earn $50,000 worth of dividends each year?

If you already have a large sum of money in your savings accounts, then you’re halfway there.

Rural Funds Group (ASX: RFF) plans to pay an 11.28 cents per share distribution in FY 2021. Based on the current Rural Funds share price, this equates to a 5% distribution yield.

This means that if you were to invest $1 million into its shares, in 12 months you would have earned $50,000 in dividends if it delivers on its plans.

Though, it wouldn’t be advisable to put all your eggs in one basket. I would suggest investors spread their funds across a number of similar yielding dividend shares or consider the Vanguard Australian Shares High Yield ETF (ASX: VHY).

This fund is invested in a total of 66 top shares which offer some of the most generous yields on the Australian share market.

What if you don’t have a million dollars to invest?

Not everyone is lucky enough to have funds of that nature to invest. So how else can you do this?

If you have time on your side, then you can achieve this by investing in dividend-paying shares which have the potential to grow strongly over the long term.

Biotechnology company CSL Limited (ASX: CSL) is probably my favourite example of this.

There will be very few investors that regard CSL as a dividend share. After all, it is paying a full year dividend of $2.952 per share in FY 2020. This represents a yield of just over 1%, which is nothing in comparison to what else is on offer on the share market.

However, if you invested in the company when it first hit the ASX boards, you would have a very different opinion.

If you invested in the biotech giant at that point, you would have paid a stock-split-adjusted price of $0.76 per share. This means that you would be earning a yield on cost (the yield on the price you paid) of 388%.

This means that if you had invested $12,900 into its shares during its IPO, you would be generating an income of $50,000 in dividends in 2020.

But what about the future? While very few shares will have as much success as CSL, I believe there are some out there which have the potential to grow their earnings and dividends at a very strong rate over the next couple of decades.

Two that jump out at me are electronic design software company Altium Limited (ASX: ALU) and lottery ticket seller Jumbo Interactive Ltd (ASX: JIN). I believe both could be well worth consider as buy and hold investments.

More reading

• Why I would invest $100,000 across these fantastic ASX shares
• Buy these beaten down ASX 200 shares after the market selloff
• 3 ASX blue chip shares I’d buy with $3,000 right now
• 2 solid ASX dividend shares for income in 2020
• Why I would buy and hold Altium and these top ASX 200 shares

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited and RURALFUNDS STAPLED. 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.

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It can be quite difficult to find ASX shares at cheap prices that aren’t value traps.

When a business looks cheap, it’s probably cheap for a reason. But there are businesses out there that could be too cheap for the underlying growth that they may produce over the next few years.

With that in mind, I think these ASX shares are now trading at crazy cheap prices:

Citadel Group Ltd (ASX: CGL)

I think Citadel is cheap because it’s trading at 15x FY22’s estimated earnings at the current Citadel share price.

The ASX software share is the market leader in healthcare software for pathology and cancer care in Australia. After the acquisition of UK business Wellbeing it is the leader in healthcare software in the UK for radiology and maternity. Management believe there are significant cross-selling opportunities with an estimated market opportunity of $250 million to $350 million of total contract value revenue in tenders over the next two to three years.

The current business is strong with a (pro forma) gross profit margin of 65.3% and (pro forma) recurring revenue being 77% of total revenue. It’s a defensive business with limited impact from COVID-19.

I believe the Wellbeing acquisition is transformative for Citadel. It opens up more growth opportunities, but it also increases the quality of the earnings in my opinion.

It could acquire more bolt-on acquisitions that make sense over time, diversifying the ASX share’s earnings further.

Vitalharvest Freehold Trust (ASX: VTH)

I think Vitalharvest is cheap because it’s trading at a 17% discount to the net asset value (NAV) at 30 June 2020.

It’s an agricultural real estate investment trust (REIT). It owns large berry and citrus farms which are leased to Costa Group Holdings Ltd (ASX: CGC), the biggest Australian horticultural company.

The ASX share receives fixed rent and variable rent from Costa. The variable rent is a 25% share of the profit of the farms that Costa rents. The drought and other issues were a big drain on profit in FY20, but it seems that is about to get better with the drought conditions improving.

New manager Primewest Group Ltd (ASX: PWG) is looking to acquire new properties that will pay more consistent rent. Properties used for food processing, storage and logistics could be more reliable. More predictable rent could be good for the Vitalharvest share price and the distribution.

The ASX share has a trailing distribution yield of 6.3%. However, I think the distribution will recover in FY21 as conditions improve.

PM Capital Global Opportunities Fund Ltd (ASX: PGF)

I think PM Capital Global Opportunities Fund is cheap because it’s trading at a 21% discount to the pre-tax net tangible assets (NTA) per share at 28 August 2020.

The listed investment company (LIC) looks to invest in global businesses that it thinks are long-term opportunities.

It owns quite a diverse portfolio of businesses. Some of the ones it owns include homebuilder Cairn Homes, Bank of America, Visa, casino business MGM China Holdings, alternative asset manager KKR & Co, Siemens and copper miner Freeport-McMoRan.

Many of the holdings that it owns could rebound strongly when the global economy recovers from COVID-19 impacts.

I like that the ASX share has almost a third of its portfolio invested in European shares, which provides attractive diversification.

The LIC recently launched a share buyback and it also increased its dividend by 25% to 2.5 cents per share. At the current PM Capital Global Opportunities Fund share price it has a grossed-up dividend yield of 6.8%. That’s a solid yield in the current low interest environment.

Foolish takeaway

Each of these ASX shares look attractively cheap to me. I think they could all beat the ASX over the next few years. I think Citadel will produce the biggest returns over the next few years because of its international growth and high margins. However, the other two look like good options for income investors.

More reading

• 2 ASX shares I’d buy in a heartbeat
• 3 ASX shares to buy for international growth
• Why it makes sense to invest in ASX tech shares
• Beat low interest rates with these ASX dividend shares
• 4 ASX growth shares I’d buy in September

Motley Fool contributor Tristan Harrison owns shares of PM Capital Global Opportunities Fund Ltd. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia has recommended Citadel Group Ltd. 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.

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If you’re currently constructing a $100,000 portfolio, you’ll no doubt be on the lookout for investment ideas.

To help you on your way, I have picked out a couple of shares which I think could be excellent core holdings.

Here’s why I think investing some of these funds across these ASX shares would be a smart move:

CSL Limited (ASX: CSL)

I think constructing a portfolio around this biotherapeutics company would be a very good starting point. Especially given that its shares are down almost 20% from their 52-week high. I feel this has left them trading at an attractive level for long term investors.

This is because I continue to believe CSL can be a market beater for a long time to come. This is thanks to the strong demand for immunoglobulins, its pipeline of potentially lucrative therapies, and recent acquisitions. I expect this to support solid earnings growth over the next decade and drive the CSL share price higher over the 2020s.

Xero Limited (ASX: XRO)

Xero could be a good long term option as well. The cloud-based business and accounting software provider was on form again in FY 2020. It delivered a 30% increase in operating revenue to NZ$718.2 million thanks to solid subscriber growth across all markets. Things were even better further down the income statement, with its margin expansion leading to a 52% increase in EBITDA to NZ$139.17 million.

While FY 2021 is likely to be impacted by the pandemic and could stifle its growth somewhat, its subscriber numbers continue to grow. At its annual general meeting it revealed that it added 96,000 net subscriber additions to its platform between April and through to 31 July. This took its subscribers to a total of 2.38 million at the end of the period. The good news is this is still scratching at the surface of its significant global market opportunity. And thanks to the quality and stickiness of its product, I expect it to capture a big slice of it over the next decade.

More reading

• ASX All Technology Index swells with new additions
• Buy these beaten down ASX 200 shares after the market selloff
• 3 ASX growth shares to buy after the market selloff
• After the crash, is it time to buy this Nasdaq ETF?
• Why the Afterpay share price crashed 9% lower today

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. and Xero. 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.

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Dividends are one of the nicest things you can get from owning ASX shares. As true passive income, dividends from a quality income share will hit your account every 6 months like clockwork. They don’t discriminate on age, gender, occupation, social status or nationality (except for tax reasons, of course). If you own the shares, you will get the dividends, period.

Whil this is a wonderful process in itself, dividends are not the end of the journey of wealth creation, they are only part of the means to the end.

Let me explain.

When you receive a dividend, you have 2 choices as to what to do with the money. Some (usually young and inexperienced) investors might treat the dividends as a windfall, ‘free money’ if you will. They will go out and buy themselves something special, a reward for their discipline in holding an income-producing asset.

That’s totally fine, of course. It’s a free market and a free country. Everyone’s money is perfectly entitled to be spent on anything its owner (legally) desires.

Dividend lessons from the past

But there’s another way to spend your dividends. I think it’s best illustrated by this quote from one of the best books on investing ever written: George S. Classon’s 1926 classic The Richest Man in Babylon. A young man is telling his older teacher about his first successful investment, upon which his teacher asks him what he is doing with the proceeds (or dividends if you will). He replies:

 I do have a great feast with honey and fine wine and spiced cake. Also I have bought me a scarlet tunic.

Upon hearing this, the young lad’s teacher responds with the following:

You do eat the children of your savings. Then how do you expect them to work for you? And how can they have children that will also work for you? First get thee an army of golden slaves and then many a rich banquet may you enjoy without regret.

Pertinent advice indeed. Dividends are a powerful force that you should aim to harness over many, many years. Cycling your dividends back into more shares is one of the best ways you can turbocharge the compounding process. Pulling your dividends away from your investments only kneecaps your portfolio’s potential returns. So if you’re not reinvesting your dividends, I would strongly encourage you to reconsider, unless you have already retired of course. Some companies even offer the chance to do so automatically with a Dividend Reinvestment Plan (DRiP). As Classon so eloquently put it, you’re ‘eating the children of your savings’ otherwise and forgoing the chance of having your own ‘rich banquet’ as soon as possible.

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Motley Fool contributor Sebastian Bowen 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.

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