When it comes to dividends, Warren Buffett has put on a decades-long masterclass. His holding company, Berkshire Hathaway, has massive positions in world-class businesses like Apple, Coca-Cola, and Bank of America. Each one regularly pays Berkshire a dividend.
Indeed, Coca-Cola alone now pays Buffett’s firm nearly $800m per year in dividends. The Oracle of Omaha has not lifted a finger to reduce that position since he first started building it in the 1980s.
Now, that figure is way beyond what a humble individual investor like myself might ever hope to achieve. But I can still follow certain elements of Buffett’s investing methodology to build sizeable passive income.
Think long term
Buffett’s philosophy is underpinned by a long-term mindset. We can see this with that Coca-Cola position, which has been held for decades. His ideal holding period is “forever“.
One of my favourite Buffett quotes is: “Someone’s sitting in the shade today because someone planted a tree a long time ago.” A tree doesn’t appear overnight and neither will wealth for most of us.
But if I invest £500 a month and achieve an average 10% return, I’d end up with £1m in just under 30 years. That assumes I reinvest dividends to really fuel compounding and actually generate a 10% return.
Neither is guaranteed — dividends or that return — but it is a realistic target, in my eyes. Buffett’s long-term average is nearly double that!
Focus on really profitable businesses
A quick scan of Buffett’s portfolio reveals that nearly all the companies make plenty of profit. That’s obviously critical for passive income as I can’t rely on flimsy firms for reliable dividends.
One stock from my own portfolio that offers a truly massive dividend yield is British American Tobacco (LSE: BATS). Currently it sits at 8.6%.
Yesterday (25 July), the company reported that its half-year revenue fell 8.2% to £12.3bn, driven lower by the sale of its businesses in Russia and Belarus last year and foreign exchange headwinds. Profit slumped 28% to £4.26bn due to amortisation charges related to its US brands.
On the surface, none of that sounds great. And growth in its New Categories division, which houses smoke-free products like Vuse vapes and Velo nicotine pouches, is being hampered by the rise in illicit single-use vapes. So that’s an ongoing risk here.
Yet the company remains a high-margin, cash-generative business that owns leading cigarette brands like Dunhill and Lucky Strike. And its smokeless brands now account for 17.9% of group revenue, up from 16.5% in H1 2023.
To my eye, the meaty dividend yield looks sustainable, and that’s why I own the stock.
Taking a stance
Now, I should point out that while Buffett admires the economics of the tobacco industry, he doesn’t invest in tobacco stocks. Yet he does invest in oil stocks, with Chevron and Occidental Petroleum being two of Berkshire’s largest holdings.
Some investors won’t invest in either tobacco or oil for ethical reasons. And that’s fine, as every investor will ultimately draw their own lines.
Whatever these standards may be, though, I think focusing on very profitable companies with proven business models will lay a solid foundation for rising income and wealth. Time and consistency are the other things I need.
The post No savings? I’d use the Warren Buffett method to target big passive income appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Ben McPoland has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended Apple, British American Tobacco P.l.c., and Occidental Petroleum. 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.
