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Reinvest dividends to make a million! Warren Buffett suggests value stocks and I agree

Kirsteen Mackay
·3-min read
One million celebration illustration.
One million celebration illustration.

I’d love to make a million from investing in the stock market. I love reading and writing about stocks, learning about the markets and following the effects of economic changes. It’s a fascinating pastime, and one that can be very lucrative when carried out correctly.

US billionaire Warren Buffett continues to make millions after eight decades of stock market investing. Early in his career, he followed the advice of value investor Benjamin Graham and has advocated his buy and hold method ever since.

It’s a sensible approach and one that’s easy for ordinary investors to get on board with. Coupled with dividend reinvestment, it can generate exponential wealth.

close-up photo of investor Warren Buffett
close-up photo of investor Warren Buffett

Start investing with little money

There’s an old saying “It takes money to make money” and that’s true in stock market investing. But it’s also true that I don’t need thousands to get started. I can invest from as little as £25 a month with a stockbroker like Hargreaves Lansdown.

But I can also start with as little as £1 if I use a modern digital platform such as Trading 212. I think this is an opportunity not to be missed. With a massive shortfall in future pension pots, it gives any of us the chance to take control of our finances.

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Reinvesting dividends

To illustrate how I can make a million begins with the power of compound interest. By contributing regularly and reinvesting my dividends, here’s how. With a 10% effective annual interest rate and £300 a month in contributions, I can make a million in 35 years. I can achieve this much more quickly by increasing my monthly contributions or generating bigger returns.

Dividends are regular payments rewarding shareholders for their commitment. When the share price rises, the shareholder benefits from both capital gains as well as dividend payments.

While £300 a month is a lot of money, over 35 years it equates to £126k in contributions. The other £901.7k is interest earned. Now, if that’s not impressive, I don’t know what is!

It also reinforces my belief that everyone should give investing a go. If nothing else, it’ll enable an investor to discover what it’s all about and have a better understanding of what goes on in pension funds. Once understood, the power of wealth generation will quickly convince people to take it more seriously and take charge of their financial futures.

Investing in a value stock

The stock market is made up of real-life businesses. When I buy shares, I’m buying a part of a company that thrives or fails. If I’ve done my homework and chosen a company that offers customers and shareholders value, then I’ll profit as the company is rewarded for its foresight. If I invest in a bad company, then I’ll lose out.

Warren Buffett advocates value investing, which involves carefully choosing a company with a competitive advantage. This could be one suffering temporary misfortune but which clearly has the set up necessary to ride out the crisis and emerge stronger.

In my mind, this could be businesses such as Auto Trader, Rightmove, Rolls-Royce or BP. All these companies suffered in 2020 but are operating from a position of strength, in one way or another, that could see them survive and thrive within another 10 years.

The post Reinvest dividends to make a million! Warren Buffett suggests value stocks and I agree appeared first on The Motley Fool UK.

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Kirsteen owns shares of BP. The Motley Fool UK has recommended Auto Trader, Hargreaves Lansdown, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021