Owning shares in companies that distribute their earnings as dividends can be a great way of earning passive income. But even stocks that don’t pay dividends can help boost my monthly income.
I own shares of Alphabet, Berkshire Hathaway, and Meta Platforms in my portfolio. None of these stocks pays a dividend, but each provides me with a passive income opportunity.
Each of the stocks mentioned returns cash to shareholders via share buybacks. And these give me the opportunity to generate passive income.
Share buybacks
To see how a company buying back its shares provides investors with passive income, let’s look at Warren Buffett’s investment in Apple shares. Since the start of 2020, Apple has repurchased 7.7% of its shares.
At the beginning of 2020, Berkshire owned around 5.7% of Apple’s outstanding shares. Apple’s share repurchasing has increased Berkshire’s ownership to around 6.2% of the overall business.
This means that Berkshire could have sold some of its Apple shares while still owning 5.7% of Apple’s overall business. The cash that it generated by doing this would have provided Berkshire with cash it didn’t have to work for, which is passive income.
The same goes for my investment in Berkshire Hathaway. Since the start of 2020, the company has reduced its share count by around 10%.
I own 40 Berkshire Hathaway shares in my portfolio. That gives me a vanishingly small percentage stake in the overall business.
If I’d owned them at the start of 2020, I could have sold four of them while still owning the same percent of the entire company. Doing so would have provided me with cash that I didn’t have to work for.
Ultimately, a company repurchasing its shares gives its shareholders a chance to sell part of their holding while retaining the same proportion of the overall business. This results in passive income for shareholders.
Passive income
It’s not just Berkshire Hathaway and Apple. Any business that uses its cash to buy back its shares provides its shareholders with opportunities to realise passive income.
Alphabet and Meta Platforms have also been buying back shares. Since the start of 2020, Alphabet has bought back 4.4% of its shares and Meta has lowered its share count by 5.8%.
Each of these has given investors like me a chance to sell some shares while retaining the same ownership of the company in percentage terms. This is why Warren Buffett likes Bank of America, which has lowered its share count by around 13% over the last couple of years.
In short, stocks that don’t pay dividends can provide opportunities for passive income. Buying back shares allows investors to sell part of their investment without diluting their ownership of the business.
