The one thing I’ve admired most about Buffett’s success isn’t the 12-figure net worth; it’s the fact that he did it with a simple investment strategy that investors of any level of experience can incorporate. It requires no extravagant technical analysis or luck – it just takes time, patience and appreciation for the power of dividends.
Dividend income cows
From 1965 to 2021, the S&P 500The total return was 32,209% (including dividends), which means that every $ 1,000 invested would be worth $ 322,090. Over the same time frame, Berkshire Hathaway’s total return was 3,641,613%, which means that every $ 1,000 invested would be worth $ 36,416,130. Ironically, Berkshire Hathaway does not pay dividends to its shareholders, but much of its success can be attributed to its commitment to own dividend stock.
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In 2021 alone, Berkshire Hathaway received $ 785 million in dividends from Apple (NASDAQ: AAPL), a company of which he owned 5.6% at the end of the year. (For perspective, every 0.1% of Apple’s earnings in 2021 equates to about $ 100 million.) The company also received $ 521 million in dividends from Kraft Heinz (NASDAQ: KHC)and that’s just scratching the surface.
The total amount Buffett’s company received in dividends in 2021 is over $ 13.4 billion. That’s more than 2021’s revenue Coinbase And Airbnb combined.
There is power in the IV
Dividend Reinvestment Programs (DRIPs) automatically take paid dividends and reinvest them in the stock that paid them.
The power of reinvested dividends cannot be overstated. From 1960 to 2021, reinvested dividends represented 84% of the total return of the S&P 500. If you had invested $ 10,000 in an S&P 500 index fund, it would be worth over $ 795,800 based on the share price alone. If you look at the value of a $ 10,000 investment over that time period with dividends reinvested, it rises to around $ 4.95 million.
Warren Buffett’s primary investment philosophy is to buy large companies and hold them for the long term. He once said, “If you’re not willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Investing often rewards the patient, but this is especially true if you own dividend stock and are willing to postpone cash dividend payments until retirement.
If you invest $ 1,000 per month in a stock with an average annual return of 8%, you would have over $ 549,000 after 20 years (while personally investing only $ 240,000) thanks to compounded earnings. If the same stock had a constant 2% annual dividend yield that you reinvest each year, it would be worth about $ 687,300 after 20 years. Reinvested dividends add to the magic of compound earnings.
Sit back, relax and enjoy the money
Retirement is when you can really start enjoying the benefits of your patience. The purpose of dividend reinvestment is to increase your holding in a stock over time, so when your retirement comes, it can be worth as much as possible before you receive cash dividends. A 2% dividend payment isn’t much on $ 10,000, but when you manage to rack up hundreds of thousands of dollars in dividend stock, it becomes a different story. An annual dividend of 2% on $ 600,000 is $ 12,000 in annual payments.
The best thing you can do to make sure you are financially prepared for retirement is to plan to have multiple sources of income. Many people will rely solely on their 401 (k) or Social Security, but those don’t have to be your only options. Consistently over time, you can manage to build a dividend portfolio that provides thousands in monthly retirement income.
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Stefon Walters has positions at Apple. The Motley Fool has positions and recommends Airbnb, Inc., Apple, Berkshire Hathaway (B shares) and Coinbase Global, Inc. The Motley Fool recommends Kraft Heinz and recommends the following options: Long January 2023 $ 200 calls Berkshire Hathaway (B shares) , March 2023 long $ 120 calls on Apple, January 2023 short $ 200 calls on Berkshire Hathaway (B shares), January 2023 short calls $ 265 on Berkshire Hathaway (B shares) and March 2023 short calls $ 130 on Apple . The Motley Fool has a disclosure policy.