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According to the Bloomberg Billionaires Index, legendary investor Warren Buffett is worth approximately $151 billion (1). However, in a 2019 interview with Yahoo Finance (2), the Oracle of Omaha said he could live comfortably on much less. In fact, he estimated that he could live well with 99.99% less wealth.
“If I were retired and had a $1,000,000 stock portfolio paying me $30,000 a year in dividends, and my kids were grown and the house was paid for, I wouldn’t worry too much about having a lot of cash on hand,” he said. Yahoo Finance Andy Serwer, editor-in-chief.
In other words, the billionaire could live like a millionaire – provided his portfolio generates at least 3% in stable and reliable dividend income. Unfortunately, achieving a 3% return requires more effort than before.
If you’re trying to replicate Buffett’s dividend-focused approach, here’s what you need to know.
Buffett’s quote comes with a number of assumptions, like having adult children, no mortgage, and a portfolio that reliably produces dividends. These conditions may not reflect the financial reality of many Americans, making it more difficult to apply his scenario to the average household.
And even if it applied to your situation, you probably haven’t seen a lucrative dividend yield in several years. The S&P 500 currently offers a dividend yield of around 1.1%, and that yield has been less than 3% since the 2008 financial crisis (3). Even the Vanguard High Dividend Yield ETF (VYM) currently only offers a dividend yield of around 2.5% (4).
Falling average yields are not a new trend, according to Deutsche Bank strategist Jim Reid (5). His analysis indicates that companies have for decades been turning to buybacks rather than dividends, with the market increasingly dominated by high-growth technology companies that prefer to reinvest much of their cash rather than pay dividends to their shareholders.
Simply put, if you’re a passive investor, you probably won’t be able to achieve Buffett’s preferred yield of 3%. However, if you are willing to diversify into other asset classes or do your own research, you may be able to exceed this threshold.
Read more: Warren Buffett Used 8 Solid, Repeatable Money Rules to Turn $9,800 into a $150 Billion Fortune. Start using them today to get rich (and stay rich)
While it can be difficult to achieve a 3% annual dividend on a million-dollar investment, there are some strategies that can help you meet or exceed that watermark. To reach this figure, you’ll need to have the same kind of foreknowledge as the Oracle of Omaha, or knowing exactly where to look – although there are lower barriers to entry to solve this problem.
Here are some ways to achieve that 3% dividend yield
When you’re looking for companies to invest in, you probably don’t want your money to become complacent. This is where high-yield accounts can come in handy, although they often serve as effective emergency funds due to their high liquidity. Their returns are also competitive with the 3% target, but you lose the shareholder base.
With SoFi, you can enjoy fee-free banking on your checking and savings accounts while earning up to 4.30% APY on your uninvested money. Better yet, when you set up direct deposit as a new account holder, you can even get a cash bonus of up to $300.
Deposits are insured up to $250,000 through SoFi Bank, with additional coverage up to $3 million through a network of participating banks.
When it comes to ETFs, not all are equal.
Some were designed to focus exclusively on stocks offering high returns. The iShares Core High Dividend ETF (HDV), for example, is a fund that screens the S&P 500 for the top 75 companies offering the highest dividend yield with relatively good financials. In November, the fund’s top holdings included Exxon Mobil, Johnson & Johnson and Chevron. The fund offers a yield of 3.5%, slightly higher than Buffett’s benchmark index (6). If you invest $1 million in this fund, you could generate around $35,000 in passive income per year.
You can invest in this ETF, alongside thousands of other funds, with platforms like Vanguard. Vanguard offers passive index investing opportunities with a minimum investment of less than $1, as well as several account options, such as Roth IRAs and traditional IRAs as well.
In addition to offering a low-cost investment platform, Vanguard also offers advisory services.
Finding a financial advisor who meets your specific needs and financial goals is easy with Vanguard.
Vanguard’s hybrid advisory system combines advice from professional advisors and automated portfolio management to ensure your investments achieve your financial goals.
With a minimum portfolio size of $50,000, this service is best suited for clients who already have a nest egg and want to try growing their wealth with a variety of different investments. All you need to do is arrange a consultation with a Vanguard advisor, who will help you create a tailored plan and stick to it.
If you prefer to do research yourself rather than work with an advisor, try to make sure you’re using reliable sources to make your investment decisions.
For example, you can use Moby, an investment research platform started by former hedge fund analysts, providing easy-to-understand investment advice. Every week, Moby rounds up his three best stock picks and delivers them straight to you – and without a lot of financial jargon.
So far, the platform has already helped over five million users discover stocks before generating multibagger returns.
Moby’s success speaks for itself. The platform’s stock picks have outperformed the S&P 500 Index by 11.95% on average over the past four years. And that’s on top of the S&P’s already consistent annualized returns — about 10% per year on average since the index’s inception in 1957.
If you’re looking for a higher yield, you can also target corporate bonds instead of government bonds.
The iShares iBoxx $High Yield Corporate Bond ETF (HYG) provides exposure to bonds issued by companies like Transdigm and Iron Mountain. The fund’s current dividend yield is over 6.2%, almost double Buffett’s benchmark (6). If you put $1 million in this corporate bond fund, you could generate about $62,000 in passive income per year. Remember that when it comes to investing, ideally the stock price increases while you also earn dividends.
Another option for higher yield is the Arrived Private Credit Fund, with a historical yield of 8.1%, which can make it a competitive alternative to a high-yield savings account, hovering around 4% APY.
Arrived’s Private Credit Fund offers a simple way to invest in real estate-backed debt investments, without having to do the research and legwork necessary to find real estate investments yourself.
Although they’re not as accessible as a high-yield savings account, you can still benefit from quarterly liquidity options, which can offer greater flexibility than other real estate investments. And with monthly dividend payments, it could be a solid option for bolstering your retirement fund.
Overall, Buffett’s comment illustrates that retirement security isn’t just about cash flow. It’s also about having income-generating assets.
Although today’s stocks may require you to take more risk to replicate Buffett’s hypothetical 3% return, understanding the trade-offs between dividends, bonds and other income-producing assets can help retirees and near-retirees think more realistically about what to do to build financial stability.
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Bloomberg (1); Yahoo Finance (2); Multipl(3); Vanguard (4); Deutsch Bank Research Institute (5); iShares (6)
This article provides information only and should not be considered advice. It is provided without warranty of any kind.
