Warren Buffett isn’t an income investor, but he does make billions in passive income every year. But how does he do it? How did the Oracle of Omaha manage to build a passive income portfolio without focusing on generating income?
The answer to this question is both relatively simple and quite complicated. He has always focused on buying companies that produce large amounts of income with substantial profit margins. He also looks for companies that have paid investors a lot of money in the past. That doesn’t necessarily mean he’s looking for high-dividend stocks.
Instead, Buffett looks for companies that return a high percentage of their cash flow to investors. That can be a sign that the management team is steadily increasing their company’s dividend.
Warren Buffett and dividend investing
One of the most outstanding examples of this strategy is the Oracle’s investment in Coca Cola. When he bought that investment in the late 1980s, the stock was offering a dividend yield of about 3%.
Today, the stock pays a dividend equal to 50% of its original investment. Also, there was capital appreciation along the way.
I try to take this approach when building my own portfolio. Rather than looking for the highest-yielding stocks on the market, I look for companies that have the potential to steadily grow their dividends over the next five, 10, or even 20 years.
Passive Income Purchases
Some companies seem to me to have these qualities. Two companies in particular are the beverage giant Diageo and the sales group Bunzl.
Both companies are currently yielding less than 3%, but they have excellent growth records. It looks like this trend will continue in the future. Diageo expects steady earnings growth over the next few years as the company expands its market share and presence in the premium beverage market.
Bunzl is planning a series of other acquisitions to spur revenue growth. As these companies invest in growth, I think they’ll also be able to return more money to investors in the form of dividends. Along the way, they might face challenges such as: B. with the crisis in the supply chain and higher costs due to inflation. These challenges could hamper growth. Still, I would buy both stocks for my portfolio today because of their potential to generate income.
Although Warren Buffett doesn’t own high profile UK stocks, I believe I can earn passive income from UK stocks by following his approach. Another strategy would be to buy some of his assets in the US for my portfolio. This is something I will also consider in my search for income.
By focusing on high quality companies that have a proven track record of returning a lot of money to investors, I believe I can generate passive income from my portfolio for life.
The item How I Would Follow Warren Buffett to Earn Passive Income appeared first on The Motley Fool Deutschland.
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This article was written by Rupert Hargreaves in English and on 3/6/2022 at Fool.com released. It has been translated so that our German readers can join the discussion.
The Motley Fool UK recommended Bunzl and Diageo. The views about the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we provide in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that by considering a variety of insights, we become better investors.
Motley Fool Deutschland 2022