In 1994, Warren Buffett’s investment in Coca-Cola shares generated $75m for Berkshire Hathaway. This year, it’s on track to return $776m in dividends.
This demonstrates the power of long-term investing. And 30 years later, I think it’s still possible to earn significant income, even just by investing a small amount regularly.
Long-term investing
Investing £10 a week in dividend stocks to aim for £2,300 a year – or £191 a month – in passive income requires an average annual return of 6% over 30 years. I think that’s highly achievable.
With interest rates currently at 5.25%, I’d look for a better return than this to justify the risk of investing. And I think there are areas of the stock market where this is achievable.
The advantage of having a long-term view is that I wouldn’t necessarily have to find a stock with a 6% dividend yield straight away. What I need is something that will average this return over time.
That means I could start by buying shares that have a lower dividend yield at today’s prices. As long as they can increase their distributions in future, they could be perfectly good investments for my target.
High-yield risks
This is important – a dividend yield of 6% or higher can indicate that investors are doubtful about a company’s long-term prospects. They might be wrong, but the risks are worth taking seriously.
British American Tobacco’s a good example. The stock currently comes with an eye-catching 10% dividend yield, but the company’s long-term prospects are worth thinking carefully about.
Cigarette volumes look set to decline in future – especially in geographies that are important to the business. And this raises a question of how long the firm will be able to maintain its dividend.
Things might not turn out as badly as the market’s expecting. But the important point is aiming for a 6% return over the long term doesn’t have to involve taking risks on unusually high yields.
A better opportunity?
With a 2.25% dividend yield, Bunzl (LSE:BNZL) doesn’t stand out as an obvious choice for a dividend investor. But over the long term, I think it could be a great passive income opportunity.
The company has been growing strongly over the last decade, causing its dividend to rise by almost 7% a year. If this keeps up, the company will return an average of 6.5% a year over 30 years.
Acquisitions are a key part of the firm’s growth strategy – and this is a risk. Even Buffett has been known to make mistakes in overpaying for businesses to grow Berkshire Hathaway.
With a market-cap of £10bn, I think Bunzl isn’t going to be short of opportunities in the near future. And this reduces the risk of making a bad decision in pursuit of growth.
Dividend income
With a company like Bunzl, I think there will be times when it grows faster than others. That’s why having a long-term outlook for the stock is important.
Over time though, I’m expecting the business to make significantly more money than it does today. And buying the stock now could be the start of a serious passive income journey.
The post Here’s how I’d invest £10 a week to aim for £191 a month in passive income appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
Yields up to 12.3% 3 top shares investors should consider for a second income
How I’d invest £20,000 in a Stocks and Shares ISA to try and maximise my returns
3 of the best FTSE 100 stocks for investors to consider buying in April
Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has recommended British American Tobacco P.l.c. and Bunzl 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.
