How I’m following Warren Buffett to earn a passive income

Warren Buffett has built a giant passive income portfolio over the past couple of decades by following a few simple rules.

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Buffett at the BRK AGM

Image source: The Motley Fool

Warren Buffett is one of the best investors of all time. He has turned an initial investment of $100,000 into a multi-billion dollar company, one of the biggest businesses in the world today.

However, it is less well-known that the so-called ‘Oracle of Omaha’ is also a passive income investor.

Indeed, every day he earns millions of dollars in dividend income, equating to billions of dollars in income over the year. 

Any investor can copy the approach he has used to build this income portfolio over the past couple of decades. 

The ‘simple’ Buffett approach 

Buffett’s approach to finding income stocks is relatively simple. He is always looking for high-quality growth stocks to buy for his portfolio. And a marker he is looking for in these businesses is their ability to return cash to investors.

A corporation that can return lots of capital to investors can be an outstanding income stock.

What’s more, companies with excellent growth prospects have the potential to increase their dividends to investors. This can make them great passive income investments as they steadily increase the distributions and return more cash. 

This is the outline of the Buffett approach that I would follow to generate a passive income for life. By following this approach, I think I will be able to build a steady and growing passive income portfolio. 

Still, there is no guarantee this strategy will yield results. As dividends are paid out of business profits, there is always a risk a corporation could have to eliminate its payout in a period of economic disruption.

Further, with prices rising significantly in the current economic environment, company profit margins could come under pressure. As such, businesses may have to reduce the amount of money they return to investors.

Passive income stocks

As such, the type of companies I would focus on acquiring for my passive income portfolio are globally-diversified growth businesses. I would acquire all three of the businesses outlined below for these reasons. 

AstraZeneca is a great example. This enterprise has a global footprint and is investing in new treatments. These have the potential to generate substantial profit growth in the years ahead. 

Another example is the publicly-traded hedge fund Man Group. Indeed, this business has a global footprint attracting capital from investors worldwide. Currently, money is flowing into the global asset management market.

Wealthy investors are looking for new ways to earn a return on their money, and firms like Man benefit. As assets grow, the group’s income from management fees should expand. Rising fee income may provide more cash for management to return to investors. 

Airtel Africa, meanwhile, owns a portfolio of mobile tower assets around the world. Demand for mobile and data services across the globe is rising. This tailwind should help push the company’s earnings higher over the next few years. 

By adding these businesses to my portfolio, I think I can replicate Buffett’s passive income approach. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc. 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.

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