I’m targeting huge dividends like Warren Buffett

One of Warren Buffett’s investments earns over 50% in dividends on his original stake. Here’s how I’m targeting similar cash returns.

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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.

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 assessed. Consider taking independent financial advice.

John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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