ASX shares can be a great tool to build a second income of $30,000 (or more) in dividends. Indeed, it'd be a great plan to utilise Warren Buffett's investment strategies to build wealth.
Compounding is one of the most powerful things that can help grow our finances. Albert Einstein once reportedly said:
Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't pays it.
I think it's completely true – compounding is a very powerful snowball that can keep rolling and help us grow our portfolios into much larger balances over time.
Warren Buffett method
The legendary investor has given out numerous pearls of wisdom over the decades, but there are two that I'm going to focus on in this article.
The first is that his favourite investment timeframe is forever. That doesn't necessarily mean we must hold onto an investment forever, but finding great businesses that we can hold for a long time is certainly beneficial. For starters, it could mean good compounding returns and it also reduces transaction costs and capital gains tax events.
According to Forbes, Buffett once wrote:
Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
Businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records for five, 10 and 20 years from now.
Given how Warren Buffett has set up Berkshire Hathaway to be long-term focused and diversified, I think he would be interested in companies like Wesfarmers Ltd (ASX: WES) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). These two businesses could form a solid basis for an ASX share portfolio that's generating a second income made up of dividends.
The other advice I'd suggest to readers is to take advantage of lower-priced quality businesses when the opportunity is there. Buffett said in 2001:
To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the 'Hallelujah Chorus' in the Buffett household. When hamburgers go up in price, we weep. For most people, it's the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don't like them anymore.
During the GFC in 2008, Buffett wrote:
Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.
I'd call both the COVID-19 crash in the first half of 2020 as well as the inflation worries of 2022 times of great opportunity. No one knows when the next crash is going to happen, but it could be a great time to invest.
Creating a second income with ASX shares
A diversified portfolio of good (ASX) shares may be able to create returns of an average of around 10% per year, which is roughly what has happened over the ultra-long-term. That number includes the impacts of market volatility and crashes over that time.
If a household can allocate $750 per month towards shares and makes an annual return per annum of 10% then it would turn into $750,000 in less than 24 years. With a dividend yield of, say, 4%, a portfolio value of $750,000 would generate $30,000 of annual dividends per year.
There are plenty of ASX dividend shares to consider that could be good long-term investments like Soul Pattinson, Wesfarmers, Brickworks Limited (ASX: BKW), APA Group (ASX: APA), Metcash Ltd (ASX: MTS), and Sonic Healthcare Ltd (ASX: SHL).
