Forget buying lottery tickets! I’d rather follow Warren Buffett and build passive income

They say statisticians don’t play the lottery for obvious reasons. Fortunately, Warren Buffett has shown us a great way of building wealth.

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UK adults spend over £2bn on lottery games every year despite never winning. As investing legend Warren Buffett once said: “No-one wants to get rich slowly.”

Like most people, I buy the odd line. But I don’t delude myself that it’s likely to result in serious wealth (even though it could). After all, the odds of scooping the Lotto jackpot are currently 1 in 45,057,474.

Therefore, I reckon investing in dividend stocks is a far better bet long term. I can become a shareholder and instantly have a claim on part of a company’s cash flows and dividends.

No extreme luck needed!

Dividend increases

One thing Warren Buffett’s holding company Berkshire Hathaway is noted for is investing in companies likely to raise their annual dividends for many years (potentially decades).

Buffett favours strong brands that sell timeless products and services. And his ideal holding period is “forever“.

A famous example here is Berkshire’s stake in Coca-Cola, which it started accumulating in the 1980s.

Fast-forward to today, the global beverages giant has just increased its annual dividend for the 62nd consecutive year.

And Berkshire’s stake, which cost $1.3bn in total, is now returning approximately $776m each year. Or $1.3bn every 20 months. Then there’s the 1,766% share price appreciation too. Incredible.

A high-yield UK stock

One FTSE 100 stock I’ve been buying recently is insurance group Aviva (LSE: AV.).

Despite the shares rising 25% over the last six months, the dividend yield is still 6.7%. That’s well above the FTSE 100 average of 3.9%.

Now, I should point out that Aviva is no Dividend Aristocrat like Coca-Cola. Its payout record has been a bit up and down in recent years. There might be more lumpiness ahead. Or no divided at all (that’s a risk).

Plus, business could always start suffering if the economy nosedives.

Nevertheless, the forecast payouts and yields look attractive to me.

Financial yearDividend per shareDividend yield
2025 (forecast)38.0p7.7%
2024 (forecast)34.7p7.0%
202333.4p6.7%

The company has been streamlining and selling off assets overseas to concentrate on its UK, Ireland and Canada markets. As a result, Aviva has strengthened its balance sheet considerably.

Its Solvency II capital ratio – a key measure used to assess financial strength – fell a little last year but remained at 207% in December. That’s excellent.

Moreover, the firm is benefitting from a boom in private health insurance. In 2023, sales here rocketed 41% year on year as NHS waiting lists hit record highs.

The figures for January showed the NHS backlog was still 7.58m cases. So Aviva could see more take-up in individual policies and businesses paying to cover their employees.

Getting rich slowly

To sum up then, my strategy is to invest money regularly into quality income stocks like Aviva and reinvest my dividends along the way. This will add fuel to the fire.

Once this pot is hopefully large enough, I’ll live off the passive income my dividend stocks pay each year.

According to historical data, the average annual return of the S&P 500 with dividends reinvested over the last 30 years is around 10.2%.

If the historical average continues (which it might not), investing as little as £75 per week could grow into £1m in just under 34 years.

I’ll take those odds every week!

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 Aviva Plc. 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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