I’d follow Warren Buffett to earn passive income while I sleep!

Warren Buffett earns passive income by owning shares in companies that make sales around the clock. Our writer thinks he could do the same.

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Buffett at the BRK AGM

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Famous billionaire investor Warren Buffett seems happy to keep working. Well into his nineties, he continues to lead the company Berkshire Hathaway.

Despite that, Buffett said for those not wanting to work decade after decade, it is important to learn how to make money while you sleep.

What does that mean in practice – and how could it help me boost my own passive income streams?

Penny after penny

Consider as an example the consumer goods company Unilever (LSE: ULVR). It sells everyday products like shampoo and soap. In some markets, it retails them in single-use sachets for pennies apiece.

Selling a commonplace product for pennies might not sound like the stuff of fortune. But the pennies soon add up. Unilever products are used several billion times a day around the world. Thanks to its brands and unique formulations, it can charge a price premium even for mundane consumer goods.

That allows the company to earn billions of pounds in profits annually — and fund a quarterly dividend to its shareholders.

So by buying even just a single share in Unilever, I could hopefully start to earn a passive income (albeit a very modest one with a single share) in the form of dividends.

While I sleep and people from Australia to Zimbabwe wash their hair, profits would hopefully be piling up at Unilever that could help fund the dividend.

Buffett knows how to earn!

That is not lost on Buffett. Indeed, a few years back he tried to buy all of Unilever.

He did not succeed. Today I could buy shares in the consumer goods giant for a similar price to what the ‘Sage of Omaha’ was offering.

But while his attempt to take over Unilever failed, Buffett owns stakes in lots of other dividend-paying companies whose products are in daily use around the globe, such as Apple and Coca-Cola.

Buffett’s investment in Apple has been incredibly successful in under a decade. But he is a smart enough investor to know that business can be unpredictable.

Ingredient inflation could hurt profit margins at Coca-Cola or Unilever. Unilever’s plan announced this week to cut thousands of roles from its workforce risks hurting employee morale and productivity.

So Buffett keeps his portfolio diversified across a range of different shares. I think that is an important risk management principle to apply even with a small portfolio too.

Keeping it simple

As a passive income plan, that sounds simple. I believe it is. By sticking to what Buffett terms ‘my own circle of competence’, I can find companies I think have good business models that can help support dividends.

If I can buy shares in them when they sell at an attractive price, I will hopefully start to build long-term passive income streams and make money while I sleep!

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple and Unilever 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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