Last year, Warren Buffett earned a dividend of 54% on his original stake in one company. I’m targeting big dividends in the same way. Here’s how.
First, let’s take a second and zip back to 1988, the year Buffett first bought shares in Coca-Cola (NYSE: KO).
The fizzy drinks giant ticked all his boxes. He understood the product and liked the financials, especially its growing dividend. The firm boasted a strong competitive advantage too – what he calls an “economic moat”.
Buffett’s investment made him a lot of money. As sales of Coke and other drinks climbed, he watched the value of his shares turn from $1.3bn to $24bn. The shares he bought at the start increased 26 times in value, but that’s not what piques my interest here.
Bigger payments
Last year, Buffett received a 2.3% yield on his stake, giving him a $703m cash return. The money he received from Coca-Cola is more than 50% of the amount he invested in the company.
It gets better, too. Coca-Cola has increased dividends every year since 1964. Buffett will expect an even bigger payment next year and the year after that.
Hold on a second though. 50%+ dividends sound great if you’re a billionaire, but what about the rest of us? I’m investing a few thousand, not a few billion. Is this growth still achievable?
I believe the answer is yes. I’m aiming for something similar, but my plan doesn’t involve investing in Coca-Cola. In fact, the strangest thing here is Coca-Cola’s return wasn’t even that good. Let me explain.
The weird thing
Since 1990, the average return of Coca-Cola – including all dividends and share price gains – was 10.15% per year. A tenth back each and every year is how Buffett’s stake grew so much.
But the weird thing is it’s not an unusually high amount. The S&P 500 return since 1957 is 10.13%. Only a little less.
Huge returns didn’t hand Buffett the big money, it was time. The man is famous for investing for decades – he likes to say his favourite holding period is “forever”. And he held Coca-Cola shares for 34 years before he received that 54% return on investment.
With the power of long-term compound interest in mind, here’s how I might do something similar.
How to do it
If I invest £1,000 for 34 years with a 10% return then it will multiply into a £25,548 stake. My returns look a lot like Buffett’s – if somewhat smaller in scale.
If that money is in a 4% dividend stock – around the FTSE 100 average – then I receive £1,046 each year. Not a bad return from my original £1,000. With an increasing dividend, I’d expect to receive more every year. I can multiply it further by reinvesting the earnings too.
There are no guarantees here though. Even average returns aren’t possible for every investor. But even taking into account the risks, I think aiming for big dividends like Warren Buffett is the best place for my money.
