Warren Buffett, who runs Berkshire Hathaway, is considered by many to be the greatest investor of all time, and looking at his performance through the years, it’s hard to argue with that point.
The one thing I’ve admired most about Buffett’s success isn’t the 12-figure net worth; it’s the fact that he’s done it with a simple investing strategy that investors of any experience level can incorporate. It doesn’t take off-the-wall technical analysis or luck — it just takes time, patience, and an appreciation for the power of dividends.
Dividend cash cows
From 1965 to 2021, the S&P 500‘s total return was 32,209% (including dividends), meaning every $1,000 invested would be worth $322,090. During that same time span, Berkshire Hathaway’s total return was 3,641,613%, meaning every $1,000 invested would be worth $36,416,130. Ironically enough, Berkshire Hathaway doesn’t pay dividends to its shareholders, but a large part of its success can be attributed to its commitment to owning dividend stocks.
In 2021 alone, Berkshire Hathaway received $785 million worth of dividends from Apple (NASDAQ: AAPL), a company it owned 5.6% of at the end of the year. (For perspective, each 0.1% of Apple’s 2021 earnings equals around $100 million.) The company also received $521 million in dividends from Kraft Heinz (NASDAQ: KHC), and that’s just scratching the surface.
The total amount Buffett’s company received in dividends in 2021 is over $13.4 billion. That’s more than the 2021 revenue of Coinbase and Airbnb combined.
There’s power in the drip
Dividend reinvestment programs (DRIPs) automatically take dividends you’re paid and reinvest them into the stock that paid it.
The power of reinvested dividends can’t be overstated. From 1960 to 2021, reinvested dividends made up 84% of the S&P 500’s total return. If you invested $10,000 into an S&P 500 index fund, it’d be worth over $795,800 based on just stock price. If you look at the value of a $10,000 investment over that time period with reinvested dividends, it jumps up to around $4.95 million.
Warren Buffett’s core investment philosophy is to buy great businesses and hold them for the long term. He once said, “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.” Investing often rewards the patient, but this is especially true if you own dividend stocks and are willing to put off cash dividend payouts until retirement.
If you invest $1,000 monthly into a stock with 8% average annual returns, you’d have over $549,000 after 20 years (while only personally investing $240,000) thanks to compound earnings. If that same stock had a steady 2% annual dividend yield that you reinvested each year, it would be worth around $687,300 after 20 years. Reinvested dividends add to the magic of compound earnings.
Sit back, relax, and enjoy the cash
Retirement is when you can really begin to enjoy the benefits of your patience. The purpose of reinvesting dividends is to increase your stake in a stock over time, so when retirement rolls around, it can be worth as much as possible before receiving dividends in cash. A 2% dividend payout isn’t that much on $10,000, but when you manage to accumulate hundreds of thousands of dollars in dividend stocks, it becomes a different story. A 2% annual dividend yield on $600,000 is $12,000 in yearly payouts.
The best thing you can do to ensure you’re financially prepared for retirement is plan to have multiple income sources. Many people will rely solely on their 401(k) or Social Security, but those don’t have to be your only options. With consistency over time, you can manage to build a dividend portfolio that provides thousands in monthly retirement income.
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Stefon Walters has positions in Apple. The Motley Fool has positions in and recommends Airbnb, Inc., Apple, Berkshire Hathaway (B shares), and Coinbase Global, Inc. The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
