Each year, renowned investor Warren Buffett writes a letter to shareholders as part of his annual report with Berkshire Hathaway. In it, he openly through some of his favourite investment ideas for the particular period, along with lessons learned. Given that Buffett has achieved an overall return from 1964-2022 of 3,787,964%, it’s safe to say that his ideas could make me rich in decades to come!
The secret sauce
Buffett refers to the power of dividends by referencing a couple of long-term investments that are yielding generous income. In 1994 he finished the purchase of 400m shares in Coca-Cola. As a result, the following year he generated $75m worth of dividend income from that particular stock.
If we fast forward to 2022, this figure has grown to a staggering $704m. The growth in the dividend per share over time is one part that has helped this number to rise. Yet the share price gains also help to boost this. Whichever way I dissect it, this is a masterful way of generating passive income over time.
Buffett has done a similar thing with American Express, which is a stock he bought back in 1995. The annual dividends received from this share have grown from $41m to $302m. The lesson? Holding on to sustainable dividend stocks can compound my future income down the line.
Letting winners run
Despite the success of Coca-Cola and American Express, it’s noteworthy that he doesn’t have a ton of stocks in his income portfolio. Rather, Warren Buffett comments that “over time, it takes just a few winners to work wonders”.
This doesn’t mean that I should only have two stocks in my income portfolio. This isn’t diversified at all and can leave me at risk of losing all of my dividends if both stocks cut the payment. Rather, the point is that if I hold a dozen stocks, I only need a couple to really outperform in order for me to do very well.
It also speaks to the fact that I want to let my winners run for years. I always have the urge to sell a stock when it has generated me a good level of profit. It’s human emotion to not want to see a profit retrace to being a loss. Yet if I can fight that urge, I can enjoy the benefits of owning a good stock for the long term.
Have an open mind
One of the musings that made me smile was when Buffett spoke about how he and his partner used to hate railroad stocks. Yet over time, the world changed. He said “we were slow to recognize the change, but better late than never.”
This rings true as an investment strategy for me. In order for me to get rich, I can’t allow myself to have a rigid viewpoint. For example, I used to think Tesla was an overhyped stock that was ludicrously overvalued. Now, it has become profitable and the share price is much more reasonable, so it’s time to change my mind.
By taking into account Buffett’s ideas, I feel that even if I can mirror a fraction of his returns, I can generate some serious profit.
