When it comes to passive income, Warren Buffett is a loner. His company Berkshire-Hathaway makes billions of pounds a year by doing absolutely nothing except owning shares in well-known success stories such as Apple And Coca-Cola (NYSE:KO).
While I may never reach that level, I’m convinced I could still build significant passive income streams by following some of the free investing lessons Buffett’s career provides.
Here are three elements of his ideology that I would apply if I were trying to build large income streams without working for it.
Do less, but better
Buffett has said that his success is largely due to making a really good investment about every five years. He also says that if you wouldn’t consider holding a stock for 10 years, you shouldn’t consider owning it for 10 minutes.
The reason for this is that he believes in long-term investing based on finding brilliant companies that are sold at fair prices and then letting time do its magic.
But unlike some investors who take a scattergun approach and hope that some of their investments will perform spectacularly, Buffett waits patiently for an opportunity he sees as excellent and then takes action in a big way.
I think I could improve my long-term performance by investing in just a few stocks with great returns rather than buying many stocks with only good returns.
Look at the source, not the current results
A common mistake people make when trying to generate passive income by owning stocks is to focus on the current dividend yield.
I think that’s a mistake because dividends are never guaranteed. Just because a company has an attractive return today doesn’t necessarily mean it will stay that way. After all, it can cancel its dividend.
Buffett’s investment career has helped him understand what really drives value. He looks not so much at what a company is doing now, but what it promises to do in the decades to come. This helps him invest in companies that have the potential to grow their earnings – and their dividends.
Put together, put together and put together again
One example of this is Coca-Cola. The company is a so-called dividend aristocrat, having increased its dividend annually for over seven decades. How is Coca-Cola able to do this?
First of all, the company operates in a market where demand is expected to be strong and stable. People will also be thirsty. In addition, the company has set itself apart from its competitors thanks to strong brands, proprietary formulas and a large distribution network.
This gives the company pricing power, which in turn can have a positive impact on profits.
Can this continue? I see a risk in consumers avoiding sugary drinks, which could potentially hurt sales. But like Buffett himself, Coca-Cola has taken timeless business principles and applied them consistently while moving with the times.
Buffett’s stake in the company brings in hundreds of millions of pounds in dividends every year. However, Berkshire does not pay dividends. Instead, the company reinvests its profits.
This is called compound interest, and it could help me build passive income streams over time, even if I don’t invest more money.
The post No savings? I’d use the Warren Buffett method to generate lifetime passive income appeared first on The Motley Fool UK.
Further reading
C Ruane does not own any of the stocks mentioned. The Motley Fool UK has recommended Apple. The views expressed on companies mentioned in this article are those of the author and may therefore 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 2024
