No savings? I’d follow Warren Buffett’s method to target lifetime passive income

By investing in undervalued companies and holding for the long term, our writer shares how they’d follow Warren Buffett’s method build passive income.

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In the world of business and finance, few names carry as much weight as Warren Buffett. His approach to investing is revered around the world and it’s enabled him to amass huge amounts of wealth.

For those with little-to-no savings, the prospect of generating a passive income may seem like a pipe dream. But I’m convinced that following Buffett’s method could help me pave the way towards a substantial and reliable passive income.

Buffett’s key principles

The so-called Oracle of Omaha has an unwavering commitment to value investing and holding stocks for the long term. He also believes in investing in businesses that he understands thoroughly.

Moreover, instead of chasing trends or trying to time the market, Buffett looks for undervalued companies with strong fundamentals. This means focusing on companies with a competitive advantage, reliable earnings and trustworthy management.

One of Buffett’s most famous principles is to be fearful when others are greedy, and greedy when others are fearful. But how does this play out in reality?

Well, during stock market downturns when investor sentiment is negative and share prices are plummeting, investors like Buffett see opportunities. They view such moments as a unique opportunity to buy high-quality companies for a discount.

Alongside this, Buffett is highly selective about the businesses he invests in. He looks for companies with a history of consistent earnings that have strong competitive advantages.

The UK stock market

When I survey the UK stock market with Buffett’s key principles in mind, I see a handful of companies that could be worthy of my investment.

For example, take Barclays (LSE:BARC). The group has a price-to-earnings (P/E) ratio of just 4.94 and relative to the other banks it looks like it’s trading with a heavy discount. This suggests to me that its shares could be seriously undervalued.

Despite this, the company enjoys a robust market position and is able to offer something a bit different to the rest of the sector since it’s far more diversified. It encompasses traditional banking services in the UK while also ranking as one of the world’s largest investment banks and maintaining a significant credit card presence in the UK and US.

That said, new arrears are slowly creeping up due to elevated borrowing costs caused by rising interest rates. This is something I’ll be keeping a close eye on.

But with a 4.6% dividend yield, hoovering up some shares could provide me with a substantial cash flow in the form of dividend payments. This will be key if I’m to achieve my goal of building a substantial and reliable passive income stream.

Aiming for a lifetime of passive income

It’s not going to be straightforward though. After all, even by employing Buffett’s time-tested principles, investing in stocks is not without its risks.

Market fluctuations, economic downturns, and company-specific challenges can impact share prices and, subsequently, dividend payments. This would negatively affect my ability to build a reliable passive income stream.

That said, by embracing Buffett’s long-term mentality and incorporating his methods into my investment journey, I should be well-placed to ride out the inevitable short-term market volatility and build a substantial passive income, even after starting from scratch.

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 assessed. Consider taking independent financial advice.

Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays 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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