Warren Buffett has figured out a slow, stable path to riches. By compounding his portfolio’s returns over many years, his company is now worth nearly $1trn. Following in his footsteps, I want to see if it’s possible to build a passive income of £140,000 starting from zero.
A lifelong journey
It’s worth remembering that the earlier I start and commit to my goal of investing with discipline, the larger my final portfolio value will be.
50 years might seem like a long time, but starting with just £200 and adding just as much every month could give me a total interest earned of nearly £3.4m if I achieve a 10% annual return. I consider that annual growth to be achievable because that’s the average annual total return of the S&P 500 from 1926 through 2022.
My strategy requires me to reinvest all of my dividends. Only when I hit my goal of £3.5m will I start spending these payouts. After all, it’s worth the wait for an annual 4% retirement dividend yield of £140k.
However, investments can rise and fall, and I have to be careful which shares I choose. A failure to build a well-diversified portfolio or to choose companies that appreciate over time could leave me with much lower returns than I forecast.
How I choose investments
One of my top-performing picks of recent years has been Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG). Since I first bought the shares just a year-and-a-half ago, they’ve returned approximately 35%.
This investment is perfect for the earlier growth stage of my portfolio. However, with a dividend yield of just 0.25%, the company isn’t going to provide the lion’s share of my residual income in retirement. Instead, it’s the type of business I think will help me get to £3.5m faster.
Of course, I have to be careful that I don’t open myself up to excessive volatility risk by chasing growth. The market commonly overvalues technology companies. This is especially true at the moment when there’s excessive enthusiasm surrounding AI.
However, Alphabet is known as one of the more stable technology companies in the magnificent seven. The company is a core holding of mine due to its more consistent results compared to its peers like Tesla and Amazon:
When I get older, I’ll get slower
As I age, I expect I’ll focus less on growth opportunities and more on reliable income. The best place to seek this is often in real estate investment trusts (REITs), which offer rental income to shareholders.
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One of the top REITs I know of is Realty Income. Investors famously call it the ‘monthly dividend company’ for its regular payouts. It has an annual dividend yield of 5%. Furthermore, over the past 10 years, the share price has increased by a healthy 53%.
A mixed and evolving strategy
By mixing a heavy emphasis on growth in my earlier years and prioritising income in my later years, I think I can succeed with my dream of an abundant retirement.
It may take some time, but I have plenty of that. While I’ll be careful of the risks, I’m committed to investing well. Right now, I’m focusing on companies like Alphabet rather than Realty Income.
