How I’m aiming for £500 a month in dividend income using the Warren Buffett method

The Warren Buffett method of investing can be simple and effective. And I’m aiming to use it to generate a monthly income of £500 from dividends.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett is arguably the most successful general investor the world’s ever seen. And one lesson he learnt early in his life was that the process of compounding can lead to life-changing returns from investments.

Buffett uses businesses as his vehicles of choice for compounding his gains. And he does so by buying shares listed publicly on international stock exchanges, or by owning businesses outright within his conglomerate company Berkshire Hathaway.

Warren Buffett’s focus on compounding

To me, the Buffett method means a focus on compounding achieved using investments backed by businesses. And to copy his approach as closely as I can, my plan involves investing in shares and share funds. But there will also be an emphasis on shareholder dividends from my investments.

I reckon dividends are one of the surest ways to compound investments. I’d aim to harvest that regular cash income from my share account and regularly reinvest it into my dividend-paying shares.

Of course, dividend income from companies isn’t guaranteed. Directors have the power to stop, or trim, dividends at will. And they often do if the underlying business performs poorly. But a focus on dividend sustainability could serve me well. So when doing my research into a business I’ll look for a record of strong cash flow and payments to shareholders. And I’d want a business to be showing a record of growth in earnings and revenue.

One opportunity that arises with expanding businesses is they often have a progressive dividend policy. And that means they aim to increase their payments to shareholders a little each year. And when business progress combines with a rising dividend, share prices can also adjust higher to reflect the improvements.

But that’s not always the case. Sometimes valuations are too high and share prices can remain immobile, or worse, they can decline despite a thriving underlying business.

Letting the businesses do the work

So aiming to buy shares at fair valuations is an important component of a strategy that aspires to use the Buffett method. But perhaps the most important piece of the puzzle is to hold investments for a long time.

After all, what’s really happening is that the businesses he buys into are doing the heavy lifting. He isn’t generally buying and selling shares regularly to compound his gains. Instead, he’s just holding onto his quality stocks and allowing the compounding to happen within the underlying businesses.

So compounding happens in my portfolio of investments when the underlying businesses show increases in revenue, earnings cash flow, shareholder dividends and the share price. And further increases build on those that have gone before. Indeed, the Buffett method is elegant in its simplicity. And I’m aiming to use it to generate an income of £500 a month from dividends.

If I can achieve an overall portfolio dividend income of around 4%, my sums show it will require a capital value of about £150,000 to deliver £500 a month. I believe that’s possible to achieve over time by regularly investing money while earning an average salary. But for me, the key to success is following the Buffett method.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bearded man writing on notepad in front of computer
Investing Articles

Is there still time to buy Scottish Mortgage shares?

The Scottish Mortgage share price has risen strongly in recent weeks. Should I pile into the FTSE 100 momentum stock…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Why I’d start buying shares with £250 today not £20,000 in future!

Is it worth waiting to start buying shares until one has more money to invest? Our writer doesn't think so…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

I’ve bought Diageo shares to boost my long-term passive income!

I plan to hold on to my Diageo shares well into retirement. Here's why I think it's a top stock…

Read more »

New virtual money concept, Gold Bitcoins
Investing Articles

Down 61%, are Argo Blockchain shares worth buying?

Argo Blockchain shares have tumbled in value. As a shareholder, Christopher Ruane considers what might come next for the business…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 UK dividend stocks with yields over 10%

These dividend stocks are the highest yielders on the UK market, says Roland Head. But how safe are these generous…

Read more »

Couple relaxing on a beach in front of a sunset
Investing Articles

I’d start buying shares for passive income with this pair

Our writer is looking to earn passive income via investing, and here are two leading stocks he might buy.

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Here’s the Shell dividend forecast through to 2024

The Shell dividend is still nearly 50% below 2019 levels. Will the oil giant use record profits to rebuild its…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 FTSE 100 stocks I think Warren Buffett might love!

Warren Buffett made his fortune thanks to the success of US shares. But here are three FTSE 100 stocks I…

Read more »