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According to the Bloomberg Billionaires Index, legendary investor Warren Buffett is worth about $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 on 99.99% less wealth.
“If I were retired and I had a $1,000,000 portfolio of stocks paying me $30,000 a year in dividends, my children were grown, and the house was paid off, I wouldn’t worry too much about having a lot of cash around,” he told Yahoo Finance Editor-in-Chief Andy Serwer.
In other words, the billionaire could live like a millionaire — provided his portfolio generated at least 3% in steady and reliable dividend income. Unfortunately, achieving a 3% yield requires more effort than it once did.
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 — such as having grown children, no mortgage and a portfolio reliably producing dividends. Those conditions may not reflect the financial reality for many Americans, which makes it harder to apply his scenario to the average household.
And even if it did apply to your situation, you probably haven’t seen a lucrative dividend yield in several years. The S&P 500 currently offers an approximate 1.1% dividend yield, and the yield has been below 3% since the 2008 financial crisis (3). Even the Vanguard High Dividend Yield ETF (VYM) currently offers only about a 2.5% dividend yield (4).
The decline in average yields is not a new trend, according to Deutsche Bank’s strategist Jim Reid (5). His analysis indicates that companies have been moving to buybacks over dividends for decades, as the market has become more dominated by high-growth technology firms that prefer to reinvest much of their cash rather than give shareholders dividends.
Put simply, if you’re a passive investor, you probably can’t reach Buffett’s preferred yield of 3%. However, if you’re willing to diversify into other asset classes or do your own research, you might be able to surpass that threshold.
Read more: Warren Buffett used 8 solid, repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
While achieving a 3% yearly dividend on a $1 million investment could be difficult, there are some strategies that might help you reach or exceed that watermark. To hit this number, you’ll need to have the same sort of prescience as the Oracle of Omaha, or know exactly where to look — although there are some lower barriers of entry to cracking this problem.
Here are a few ways to approach achieving that 3% dividend yield
As you’re looking for companies to invest in, you probably don’t want your cash to get complacent. That’s where high-yield accounts can help, although they often double as effective emergency funds due to their high liquidity. Their yields are also competitive with the 3% target, but you lose out on the stock ownership.
With SoFi, you can get fee-free banking on your checking and savings accounts while earning up to a 4.30% APY on your uninvested cash. Even better, when you set up a direct deposit as a new account holder, you can even get a cash bonus 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.
As for ETFs, not all are made equal.
Some have been built to exclusively focus on stocks offering high yields. The iShares Core High Dividend ETF (HDV), for instance, is a fund that screens the S&P 500 for the top 75 companies that offer the best dividend yield with relatively good finances. As of November, the fund’s top holdings include Exxon Mobil, Johnson & Johnson, and Chevron. The fund offers a 3.5% yield, which is slightly higher than Buffett’s benchmark (6). If you invested $1 million in this fund, you could generate roughly $35,000 in passive income annually.
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, and multiple account options – such as Roth IRAs and Traditional IRAs, too.
Beyond offering a low-cost investing platform, Vanguard also has advisory services.
Finding a financial advisor that suits your specific needs and financial goals is simple with Vanguard.
Vanguard’s hybrid advisory system combines advice from professional advisers and automated portfolio management to make sure your investments are working to achieve your financial goals.
With a minimum portfolio size of $50,000, this service is best for clients who already have a nest egg built and would like to try to grow their wealth with a variety of different investments. All you have to do is set up a consultation with a Vanguard advisor, and they will help you set a tailored plan and stick to it.
If you’d rather do research yourself than work with an advisor, try to make sure you’re using trustworthy sources to make your investment decisions.
For instance, you could use Moby, an investment research platform launched by former hedge fund analysts, providing easy-to-understand investment advice. Every week, Moby rounds up their top three stock picks and delivers them straight to you — and without too much financial jargon.
So far, the platform has already helped over five million users uncover stocks before they deliver multibagger returns.
Moby’s success speaks for itself. The platform’s stock picks have outperformed the S&P 500 index by an average of 11.95% over the past four years. And that’s on top of the S&P’s already consistent annualized returns — about 10% a year, on average, since the index’s 1957 inception.
If you’re looking for a higher yield, you could also target corporate bonds instead of government ones.
The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) offers exposure to bonds issued by corporations like Transdigm and Iron Mountain. The fund’s current dividend yield is over 6.2% — nearly double Buffett’s benchmark (6). If you placed $1 million in this corporate bond fund, you could generate roughly $62,000 a year in passive income. Just remember that when it comes to investing, ideally, the share price is growing while you’re earning dividends too.
Another option for a 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 straightforward way to invest in real estate-backed debt investments, without needing to do the research and legwork of finding real estate investments yourself.
Although not as accessible as a high-yield savings account, you can still get quarterly liquidity options, which can provide greater flexibility than other real estate investments. And with the monthly dividend payouts, it could be a solid option to bolster your retirement fund.
All in all, Buffett’s comment illustrates that retirement security isn’t just about cash on hand. It’s also about having income-generating assets.
While today’s stocks might mean you have to take on more risk to replicate Buffett’s hypothetical 3% return, understanding the trade-offs between dividends, bonds and other income-generating assets can help retirees and near-retirees think more realistically about what it takes to build financial stability.
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Bloomberg (1); Yahoo Finance (2); Multpl (3); Vanguard (4); Deutsch Bank Research Institute (5); iShares (6)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
