Image source: The Motley Fool
When it comes to income, few people have been as successful as Warren Buffett. A company of famous investors Berkshire Hathaway generates billions of pounds each year without doing anything for it other than holding shares in blue-chip businesses such as an apple again Coca-Cola.
Although Buffett has more resources at his disposal than any small private investor, I still believe the lessons from them How he does what he does so that it can be used profitably even on a very small scale.
Sticking to a proven recipe
For example, Buffett is not really an inventor. And he is not a trader, who often dips in and out of stocks trying to make a quick profit.
Instead, he does something simple – and he does it well. He identifies companies that he understands and think have excellent long-term trading prospects and are trading at attractive share prices. Then he buys them and usually holds them for a long time, hoping that if he makes the right choice he will be rewarded with dividends, an increase in the stock price, or both.
That’s a simple, but potentially very powerful, idea of doing nothing.
Applying the theory
When Buffett receives dividends, he does not use them to fund payments to Berkshire shareholders. Instead, you replant them. That simple step can be used by small shareholders, by consolidating their shares.
Imagine that I invested £300 every month in income shares and compounded at 7% per annum, due to reinvestment of profits. After ten years, I had a portfolio throwing in £3,600 each year in dividends.
I can continue compounding like Buffett did, or start drawing it as income.
One income share to consider
As an example, one stock that I think dividend-oriented investors should consider is insurance Aviva (LSE: AV). I FTSE 100 The firm cut its dividend in 2020 but has been raising it steadily. Currently, the yield stands very close to my example above, at 7.1%.
Basically, like Buffett, I always keep my portfolio diversified between different stocks. That means I can still achieve the average target yield even though some of the stocks I own are high-yielding and others are low-yielding.
The insurance market is huge and I see no reason for that to change. Some insurance is compulsory, and most is voluntary but customers buy it every year. That attractive level of demand makes for a very competitive industry. One risk I see for Aviva is smaller competitors trying to break into its strong market by offering competitive prices, meaning it could lose customers.
Its large customer base is actually one of my favorite things about Aviva. I also think its strong brand and deep knowledge in what is a complex industry would help it to be competitive.
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