Image source: Getty Images
Let’s be honest, none of us will ever build wealth to rival Warren Buffett. The 95-year-old US billionaire is arguably the greatest investor ever. But we can learn from how he did it to build our own more modest levels of wealth.
Even starting with no savings at all, it’s possible to plan sensibly for the long term. At The Motley Fool, we believe the best way to do this is by investing in the wealth-building machine that is the stock market. And there’s no better place to draw inspiration than Buffett, who has spent decades explaining exactly how he does it.
Understand long-term compounding
Many new investors assume the stock market is a get-rich-quick scheme. In reality, it’s the opposite. Building wealth through equities takes years. It means owning a spread of shares that offer not just the potential for capital growth, but something beginners often overlook: dividend income.
The FTSE 100 is particularly strong here, hosting some of the most generous dividend payers in the world. By reinvesting those payouts, investors buy more shares, which then generate more dividends, creating a powerful compounding effect over time. Any share price growth comes on top of that.
FTSE 100-listed tobacco group Imperial Brands (LSE: IMB) has a brilliant track record of rewarding investors. Its shares are up around 15% over the past year and 85% over five years. On top of this, they offer that magic ingredient, income.
Today, the stock has a trailing yield about 5.3%, comfortably ahead of most cash savings rates. Imperial Brands has increased its dividend every year this century, with the sole exception of the pandemic-hit 2020. That gives investors not just income, but income that rises over time, helping to offset inflation.
Imperial Brands for income
In 2026, the yield’s forecast to climb to 5.58% as a result, then climb again to 5.86% in 2027. That means it’s rising in real terms.
Shares are more volatile than cash in the short term. Capital values will rise and fall, but that volatility is the price investors pay for the superior long-term returns from equities.
Imperial Brands faces challenges, like every company. Smoking rates are falling in the West and health and regulatory threats aren’t going away. However, I think it’s well worth considering today with a long-term view. Many investors will want to steer clear of Big Tobacco altogether. No problem. Plenty of other FTSE 100 stocks offer similar compounding potential and in some cases even more.
But Buffett stresses the key to investing is time: “My life has been a product of compound interest. Nothing more. Nothing less. And nothing brilliant.”
That’s hugely encouraging. Investors don’t need to match his genius. They need time. It’s why Buffett urges people to start early. As he puts it: “I started building this little snowball at the top of a very long hill.”
Some people think it’s too late to invest. It isn’t. Few of us know how long that hill is going to be. That’s why the best time to start investing is today.
