How I aim for £ 500 per month in dividend income using the Warren Buffett method
Warren Buffett is arguably the most successful generalist investor the world has ever seen. And one lesson he learned early in his life is that the process of capitalizing can lead to life-changing returns on investment.
Buffett uses corporations as the vehicles of choice to compound his earnings. And he does this by buying publicly traded stocks on international stock exchanges, or by directly owning companies within his conglomerate. Berkshire Hathaway.
Warren Buffett’s emphasis on composition
For me, the Buffett Method means a focus on composition achieved with the help of corporate backed investments. And to copy his approach as closely as possible, my plan is to invest in stocks and equity funds. But the focus will also be on dividends from the shareholders of my investments.
I think dividends are one of the safest ways to compose investments. My goal would be to collect this regular cash income from my stock account and regularly reinvest it in my dividend paying stocks.
Of course, corporate dividend income is not guaranteed. Directors have the power to stop or reduce dividends at will. And they often do if the underlying business is performing poorly. But focusing on dividend sustainability might serve me well. So, when researching a company, I’ll be looking for a history of strong cash flow and shareholder payments. And I would like a business to have a record of profit and revenue growth.
One opportunity that presents itself with growing companies is that they often have a progressive dividend policy. And that means they aim to increase their shareholder payouts a bit each year. And when business advancements combine with a rising dividend, stock prices may also adjust upward to reflect the improvements.
But it’s not always the case. Sometimes valuations are too high and stock prices can stand still, or worse, they can go down despite flourishing underlying activity.
Let companies do the work
Thus, aiming to buy stocks at fair valuations is an important part of a strategy that aspires to use the Buffett method. But perhaps the most important piece of the puzzle is to hold onto investments for a long time.
After all, what is really happening is that the companies he buys from are doing the heavy lifting. He usually doesn’t buy and sell stocks on a regular basis to increase his earnings. Instead, it just keeps its quality stocks and allows the makeup to happen within the underlying companies.
So, the mix occurs in my investment portfolio when the underlying companies show an increase in income, earnings cash flow, shareholder dividends and share price. And other increases build on those that came before. Indeed, the Buffett method is elegant in its simplicity. And I intend to use it to generate an income of Â£ 500 per month from dividends.
If I can achieve an overall portfolio dividend income of around 4% my sums show that it will take a capital value of around Â£ 150,000 to deliver Â£ 500 per month. I believe it is possible to achieve this over time by regularly investing money while earning an average salary. But for me, the key to success is to follow the Buffett method.
And here’s a good place to start my research:
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Kevin Godbold has no position in any of the stocks mentioned. The Motley Fool UK owns shares and has recommended Berkshire Hathaway (B shares). The Motley Fool UK recommended the following options: $ 200 long call options in January 2023 on Berkshire Hathaway (B shares), $ 200 short call options in January 2023 on Berkshire Hathaway (B shares) and d options. ‘short purchase of $ 265 in January 2023 on Berkshire Hathaway (B shares). The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.