When it comes to earning money without working for it, Warren Buffett certainly knows a thing or two.
In fact, it was Buffett who said that, “if you don’t find a way to make money while you sleep, you will work until you die”.
That may sound dramatic.
But making money while you sleep – also known as earning passive income – can be a very powerful tool to build wealth even from modest beginnings. Buffett started with no money of his own except what he saved from his paper round – and is now a billionaire many, many times over.
By taking a few leaves from his book, I reckon I could potentially build massive passive income streams.
Look where the ball is going
Warren Buffett is a smart enough investor to know that a company’s current performance is not enough to justify an investment.
Instead, he looks at whether he thinks a company has what it takes to do brilliantly in the future – and whether that is reflected in its share price.
So the current dividend yield of a share is not necessarily an indication of what sort of passive income it might generate in future.
Instead, Warren Buffett looks at what sort of business advantages it enjoys and how its finances look. From that he can decide whether he likes the future income generation potential of a business. That in turn influences its ability to pay a dividend.
That has led Buffett to own Dividend Aristocrats like Coca-Cola and American Express, that have raised their dividend annually for decades since he purchased them.
The power of compounding
In fact, in his most recent letter to shareholders of his firm Berkshire Hathaway, Buffett pointed out that he spent $1.4bn on Coca-Cola shares back in the 1980s and 1990s. That holding now generates over $700m of dividends every year.
In other words, Buffett is getting half his original investment back every year as passive income – and still owns the shares, which incidentally have soared in value.
That shows the benefit of finding the right companies to invest in.
But it demonstrates another thing that has been critical to Buffett’s fortune-building.
What does Warren Buffett do with all those dividends? He uses them to make more investments that in turn will hopefully also generate large returns.
Aiming high
That is known as compounding.
When it comes to passive income, it can be tempting to start taking dividends as income immediately.
But if I wanted to build massive passive income streams, I would not do that. Instead, I would compound my dividends. By taking a long-term approach like Buffett does, that could let me generate larger earnings in future.
For example, imagine I invest £300 each month in shares yielding an average 8%. If I take the dividends out as cash, after 25 years I would be earning £7,200 annually.
But if instead I invested the same amount and compounded the dividends, after 25 years my portfolio would be able to generate almost £22,000 in passive income generally, if I decided to start receiving the dividends as cash.
Warren Buffett often emphasises the power of simplicity. I think building large passive income streams can indeed be simple. But it will not happen unless I take the right steps to make it happen!
The post I’d follow Warren Buffett to start building massive passive income streams appeared first on The Motley Fool UK.
Amazing Nerd Stock smashes FTSE with 1,346% gains
What makes this company so extraordinary?
It has a cult-like following of nerdy fans who tend to spend lots of money…
…potentially handing investors market-beating gains in any economy.
Though past performance does not guarantee future results, last year, this amazing company saw:
Double-digit revenue growth – to a total £470,800,000
Profits explode 46%
Insiders buying a monster £492,000 of shares
…Setting investors up for – what could be – another decade of spectacular returns.
Want to consider joining them?
Then grab this special report: ‘One Top Growth Stock from The Motley Fool’ which includes both the risks and opportunities.
Secure your FREE copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
What would it take for Rolls-Royce shares to hit £10?
My best passive income idea for 2024
I’d start buying shares with a spare £750 like this
£16,000 in savings? I’d buy cheap shares in an ISA to try and retire early
Could the Tesla share price reach $1,580 by 2029?
American Express is an advertising partner of The Ascent, a Motley Fool company. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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.
