One of Warren Buffett’s most famous pieces of advice is: “If you are not prepared to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
This quote underscores the importance of long-term investing, especially for those who don’t have a large starting capital or savings well into adulthood. To build wealth, we need to develop a mindset that looks at the decades ahead.
In other words, we need to invest regularly and be patient. The good news is that it is possible and can lead to a significant passive income stream in the long term.
Take advantage of the compound interest effect
When it comes to building wealth, compound interest is an investor’s best friend. In fact, Buffett himself admitted: “My life was a product of compound interest.”
In particular, the “Oracle of Omaha” has consistently reinvested the profits from his investments back into the market. This strategy has allowed his capital to continue to grow. The longer he holds on to his successful investments, the more interest they earn and the more they increase significantly in value.
In fact, the effect was so strong that he accumulated about 90 percent of his $135 billion fortune after age 60 (he is now 93).
To give a banal example: If I invest £5,000 in a dividend share with a juicy dividend yield of 7 percent, I can expect an annual return of £350 – assuming the payout is not cut (which is always possible).
While that’s nothing to complain about, it’s not a particularly attractive sum either. However, if I reinvest my dividends in buying more shares at the same average price, that £3,500 becomes £38,061 after 30 years.
High-quality inventory
I have used this reinvestment strategy with my shares in BBGI Global Infrastructure (LSE:BBGI).
This is a FTSE250 Infrastructure investment company that manages a portfolio of 56 assets in the UK, Europe, North America and Australia, including schools, hospitals, toll bridges, motorways and military barracks.
BBGI receives revenue from public entities based on the availability and performance of these assets, rather than their use. This provides the company with predictable cash flows, which in turn have resulted in consistent and increasing dividends.
A dividend of 8.4 pence per share is expected for the 2024 financial year. With a current share price of 135 pence, this corresponds to an attractive yield of 6.2%.
Now I must mention that the yield is at an all-time high due to the high interest rate environment. This has had a negative impact on the value of the company’s assets and has made it much more difficult to grow its portfolio. There is a risk that these conditions will continue for some time or even worsen.
What is reassuring, however, is that BBGI says its current portfolio of assets could support increasing dividends for another 15 years. That sounds like music to my ears.
A powerful portfolio
Let’s say I start from scratch and invest £750 each month in quality stocks like BBGI. Assuming I get an average return of 8.5% over the long term (with dividends reinvested), here’s what would happen.
|
Year |
Deposits |
Accrued interest |
balance |
|---|---|---|---|
|
1 |
£9,000 |
350 € |
9,350 € |
|
5 |
£9,000 |
£10,405 |
£55,405 |
|
10 |
£9,000 |
£48,717 |
£138,717 |
|
15 |
£9,000 |
£128,989 |
£263,989 |
|
20 |
£9,000 |
£272,355 |
£452,355 |
|
30 |
£9,000 |
£891,485 |
£1,161,485 |
My portfolio would grow to an incredible £1.16 million in 30 years (excluding platform fees)!
If my shares were paying an average dividend of 7% at that time, I could be earning a passive income of £81,303 per year.
In my opinion, converting £750 a month into this amount would be the equivalent of building a passive income empire.
The post No savings at 35? I’d follow Warren Buffett and try to build a passive income empire appeared first on The Motley Fool UK.
Further reading
Ben McPoland has positions in Bbgi Global Infrastructure. The Motley Fool UK has no position in any of the stocks mentioned. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
