One of Warren Buffett’s well-known pieces of advice is: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
This quote emphasises the importance of long-term investing, especially for those without a large starting sum or savings well into adulthood. To build wealth, we need to adopt a mindset focused on decades.
In other words, we will need to regularly invest and be patient. The good news is that this is possible and can lead to a sizeable passive income stream down the road.
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Harness the power of compound interest
When it comes to building wealth, compounding is an investor’s best friend. Indeed, Buffett himself admitted that: “My life has been a product of compound interest.”
Specifically, the ‘Oracle of Omaha’ has consistently reinvested the profits from his investments back into the market. This strategy has allowed his capital to keep growing. The longer he holds onto his winning investments, the more they compound, significantly increasing in value.
Indeed, the effect has been so powerful that around 90% of his $135bn fortune was accumulated after the age of 60 (he’s now 93).
To use a more mundane example, if I invest £5,000 in an income stock with a juicy 7% dividend yield, I can expect to earn £350 annually, assuming the payout isn’t cut (which is always possible).
While nothing to grumble about, it’s not really a mouthwatering sum. However, if I reinvest my dividends back into buying more shares at the same average price, that £3,500 becomes £38,061 after 30 years.
High-quality stock
I’ve chosen this reinvestment strategy with my shares in BBGI Global Infrastructure (LSE: BBGI).
This is a FTSE 250 infrastructure investment company that manages a portfolio of 56 assets across the UK, Europe, North America, and Australia. These include schools, hospitals, toll bridges, motorways, and army barracks.
BBGI earns income from public authorities based on the availability and performance of these assets rather than their usage. This provides the company with predictable cash flows, which in turn has supported consistent and rising dividends.
The stock is expected to pay a dividend of 8.4p per share for FY24. At today’s share price of 135p, that translates into an attractive forward yield of 6.2%.
Now, I should mention that the yield is at a historic high due to the high interest rate environment. This has negatively impacted the value of the firm’s assets and also made building out its portfolio much more challenging. There’s a risk these conditions could persist for some time or even worsen.
Reassuringly though, BBGI says its current portfolio of assets could support rising dividends for another 15 years. That’s music to my ears.
A mighty portfolio
Let’s assume I start from scratch and invest £750 every month into quality stocks like BBGI. Assuming I generate a long-term average return of 8.5% (with dividends reinvested), this is 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 £1.16m in 30 years (excluding any platform fees)!
If my shares were by this point yielding an average of 7% in dividends, I could be earning £81,303 a year in passive income.
In my view, turning £750 a month into this would be equivalent to building a passive income empire.
