£10,000 in savings? I’d follow Warren Buffett and buy dividend growth stocks

Warren Buffett has put on an investing masterclass for more than half a century, and it is something all investors can learn from.

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Warren Buffett is undoubtedly one of the greatest investors of all time. Not only has he amassed massive wealth, but he’s also helped many long-term Berkshire Hathaway shareholders achieve financial freedom too.

Understandably, many investors marvel at the big share price winners. For example, his investment in Apple shares, first purchased in Q1 of 2016, has risen in value by around 600%.

However, one aspect that I find impressive is the dividend growth of his stocks. This is often overlooked because it is happening gradually over years and is therefore not as eye-catching. But those annual returns soon start to compound and produce amazing results.

So, if I had £10k in excess savings today, here’s why I’d consider investing in dividend growth stocks.

Coca-Cola

Buffett completed his purchase of Coca-Cola shares in the 1990s after accumulating them for several years.

They cost $1.3bn, which was a huge sum for Berkshire back then. However, after receiving 30+ years of rising dividends from the soda behemoth, Buffett’s firm was set to earn $736m in dividends last year.

Up from just $75m in 1994!

The dividend yield on Coke shares today is 3%. For Buffett, the annualised yield on cost is currently 57% (and growing). This lays bare the incredible power of long-term investing.

Diageo

One example of a dividend growth stock that I think is capable of reliably increasing its dividend for many more years is Diageo (LSE: DGE).

Again, this isn’t a particularly high-yielder (currently a forecast 3% yield for next year). But as we saw above, that might not matter long term. It’s about constent dividend growth, rather than a high starting yield with stocks like these.

The spirits giant has been in the doldrums lately due to slowing sales in the US as well as the Latin America and Caribbean region. There’s a risk this weakness will persist for much of 2024.

However, from a dividend perspective, there’s a lot to like here. For one, the firm owns timeless brands such as Johnnie Walker, Guinness, and Gordon’s, the world’s most-popular gin. It sells these at a nice profit.

Second, the global demand for these premium brands isn’t likely to dry up anytime soon. So while sales can ebb during tough economic times, as we’re currently seeing, ultimately drinkers are always likely to want to indulge in their favourite tipple.

Third, the fundamentals of the company are sound. There are no major balance sheet concerns and the payout is well-covered by forecast earnings.

Plus, Diageo still appears to have long-term growth opportunities as disposable income rises in high-growth regions like Asia. As with Coca-Cola, it already operates in just about every corner of the planet.

Potential long-term returns

The annual Diageo dividend has grown in the 4%-5% range over many years. Assuming that continues (which isn’t guaranteed, of course), and adding in a further modest average share price growth of 4%, then that would give a figure of 8.5%.

In this scenario, my invested £10,000 would grow to £106,527 after 29 years. Without lifting a finger!

That’s why dividend growth stocks can be unsung heroes within a well-diversified income portfolio.

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.

Ben McPoland has positions in Apple and Diageo Plc. The Motley Fool UK has recommended Apple and Diageo Plc. 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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