Warren Buffett is one of the best investors to learn from. And the Berkshire Hathaway (NYSE:BRK.B) CEO has a distinctive approach to generating passive income.
Berkshire is well-known for its massive cash pile that is used to fund investments. But Buffett’s most recent moves have left the company’s savings pot untouched.
Dividend stocks
Since 2020, Berkshire has been investing in shares of Japanese trading houses. And earlier this week, the company announced it had increased its stake to around 8.5% of each business.
At the most recent annual meeting, Buffett stated that he thought the businesses had good prospects and paid attractive dividends. This makes them attractive for income investors.
Importantly, though, Buffett didn’t raid Berkshire’s savings to finance the deals. Instead, the company issued bonds denominated in Japanese yen and used the proceeds to make the investments.
Berkshire’s bonds carry a 0.7% coupon. But the companies it has invested in have dividend yields between 2.4% and 4.2%.
In other words, as long as the trading houses don’t lower their dividends (or cut them entirely), Berkshire stands to make a profit. It pays out 0.7% and gets back between 2.4% and 4.2% each year.
Risk
If the businesses are as predictable as Buffett thinks, this looks like a decent deal. But why use debt to finance the deal instead of Berkshire’s available cash?
The answer is it removes some of the risk. If the value of the yen against the dollar goes down over time, Berkshire’s returns might be lower when converted back to US currency.
Issuing bonds in Japanese currency reduces this risk. This way, if the yen weakens against the dollar, the value of the interest Berkshire pays on its debt goes down as well.
Buffett’s investment is a way of earning passive income without using savings. By issuing debt, Berkshire can keep the difference between the dividends it receives and the interest it pays.
This is all well and good for an investor like Buffett, but I don’t have the ability to issue debt in Japanese yen and I certainly can’t raise cash at 0.7% interest. So what can someone like me do?
Berkshire Hathaway
Berkshire’s size and the strength of its balance sheet gives it opportunities that aren’t available to ordinary investors like me. But there is something I can do to join the action.
By buying Berkshire Hathaway shares, I can own part of Buffett’s business. That way, when the Oracle of Omaha does a deal, I stand to benefit as well.
According to Buffett, Berkshire’s size is more of a hindrance than a help. And there’s a risk the company might struggle to achieve significant growth going forward.
I think, though, that there’s more opportunity than danger. Berkshire is a unique business and this provides unique opportunities.
In my view, the best way for an investor like me to invest like Warren Buffett is to invest with Warren Buffett. And that involves using part of my monthly income to buy shares in Berkshire Hathaway.
