Passive dividend income is something that few investors would turn their noses up at. The ability for me to receive a stream of income from a portfolio of dividend paying stocks over the course of the year is very attractive. Of course, getting advice on the best way to go about this from legendary and experienced investors always helps. So what can I glean from the words of Warren Buffett in this regard?
Caution when looking at yields
Warren Buffett is widely regarded as one of the greatest investors of our generation. His track record of investments via his company Berkshire Hathaway is well documented, so I learn what I can.
The first point I noted from Buffett that can help me is a cautionary one. He has commented that, “the rearview mirror is always clearer than the windshield”.
I think this is very true when it comes to picking stocks for passive dividend income. The main ratio used is the dividend yield calculation. This compares the current share price to the annual dividend per share. Although the share price is live, the dividend used is often one that has already been paid, or is due to be paid shortly.
So it really reflects past information about what dividends have been declared. In effect, a clear rearview mirror! Looking ahead to what dividends I might receive next year, or the year after, is less clear. I need to be careful on picking stocks that don’t just have a high yield now, but ones that I think are sustainable dividend payers in the future.
Build up passive dividend income over time
One of my all-time favourite quotes from Warren Buffett was when he said, “someone is sitting in the shade today because someone planted a tree a long time ago”.
I think this is particularly pertinent when discussing passive dividend income. Unless I have a large amount of spare cash ready to invest right now, I’ll most likely have to invest smaller amounts regularly in years to come. Yet this doesn’t mean that it’s a bad thing. Like the growth of the tree, my dividend income will grow over time.
Thanks to the benefit of compounding if I reinvest my dividend income back into the stock, my portfolio can grow significantly over the years. It’s true that can take years before I get to where I want to be, but I’m confident the end goal is worth it.
The right mindset
The final point that can help me on passive dividend income is with regard to Buffett’s timeframe when buying stocks. When asked about this, he said, “our favourite holding period is forever.”
For the dividend stocks that I’m thinking of buying, I want to have this same mindset. Buying a company just because I expect a bumper income payout in the short term might not serve me well in the long term. Rather, being comfortable with the income prospects of a business at a fundamental level is ideal.
Obviously, it’s impossible to have a crystal ball on the future dividend income from a stock, but if I think the business model is sound, it’ll help me have the right mindset.
Overall, when looking for passive dividend income tips, I can learn much from Warren Buffett.
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jonathansmith1 and The Motley Fool UK have 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.