I think that buying income stocks could set me on the path to becoming a millionaire. And my plan for getting there involves following the principles of one of the greatest investors of all time.
If I invest £1,000 per month at an average annual return of 6%, I’ll be a millionaire after 30 years. And I plan to do it using the method Warren Buffett has had such spectacular success with.
Slow and steady
Rather than looking for spectacular returns, the Warren Buffett method involves trying to make money gradually over time. This involves finding opportunities where the risk is limited.
With income stocks, this is most important when looking at dividend yields. Rather than buying a risky stock with a high yield, it’s better for me to buy a stronger business with a lower dividend.
According to Buffett, reaching for yield is a big mistake. I’m trying to average a 6% annual return, but that doesn’t mean I should take unnecessary risks in order to get there.
If I have a choice between a risky stock offering a 6% return and a safer investment offering a 4% return, Buffett thinks I should take the 4%. Over time, this strategy will achieve the best result.
Avoiding losses
Avoiding excessive risks is important to the Warren Buffett method. This is because losing money makes it that much harder to achieve my investing goals.
If I manage to compound my investments at 7% for 20 years, I’ll have a portfolio worth around £525,000. But if I lose 10% the next year, I’ll go back to £472,500.
From there, I’ll need to achieve a 9% return per year to get to £1,000,000 by year 30. And that’s a much more difficult undertaking.
That’s why Buffett says the first rule of investing is to avoid losing money. With income stocks, this means buying companies that will distribute steady passive income going forward.
Patience
The Buffett method is all about sticking to low-risk investments and being patient in getting to my goals. But that’s not to say there’s nothing I can do to get there faster.
I can absolutely speed up my journey to a million. But it’s not by looking for income stocks with higher yields, or by chasing bigger returns.
The way to get to my destination more quickly is by investing more cash. If I invest more than £1,000 per month, I can bring down the number of years it takes me to get to a million.
If I can invest £1,100 per month at a 6%, I can get to a million in 29 years. Investing £1,500 will get me there in 25 years, and monthly investments of £2,000 will reach a million in 21 years.
Investing more money, particularly early on, is the way to cut down the time it takes me to reach my goals. Chasing bigger returns by buying riskier stocks isn’t.
