When it comes to passive income, Warren Buffett is a one-man masterclass. His company Berkshire Hathaway earns billions of pounds a year for doing precisely nothing, beyond owning shares in known success stories such as Apple and Coca-Cola (NYSE: KO).
But while I may never get anywhere near that level, I think I could still build sizeable passive income streams by following some of the free investing lessons offered up by Buffett’s career.
Here are three elements of his ideology I would employ as I try to build large income streams without working for them.
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Do less, but better
Buffett has said his success is largely down to one really good investment every five years or so. He also says that if you would not consider holding a share for 10 years, you should not consider owning it for 10 minutes.
That is because he believes in long-term investing, based on finding brilliant companies selling at fair prices and then letting time work its magic.
But unlike some investors who take a scattergun approach and hope that some of their investments do spectacularly well, Buffett waits patiently for what he sees as an excellent opportunity and then goes into it in a big way.
I think investing in just a few great income shares could help me improve my long-term performance compared to buying lots of merely good ones.
Look at the source, not the current results
One common mistake people make when looking to earn passive income by owning shares is focusing on the current dividend yield.
I see that as a mistake because dividends are never guaranteed. Just because a company has an attractive yield today does not necessarily mean it will stay that way. After all, it may cancel its dividend.
Something that has helped Buffett in his investing career is understanding what really drives value. He does not look at what a company does now so much as what it has the potential to do over the course of decades to come. That helps him invest in firms that can potentially grow their profits – and their dividends.
Compound, compound, and compound again
An example is Coca-Cola. It is what is known as a Dividend Aristocrat, having raised its dividend annually for over seven decades. How is Coca-Cola able to do that?
For a start, it operates in a market likely to see strong, resilient demand. People will also be thirsty. Beyond that, it has set itself apart from rivals thanks to strong brands, proprietary formulas and a large distribution network.
That has helped give it pricing power which, in turn, can help profits.
Can that continue? One risk I see is consumers turning away from sugary drinks, potentially hurting sales. But, like Buffett himself, Coca-Cola has taken timeless business principles and applied them consistently, while moving with the times.
Buffett’s stake in the company generates hundreds of millions of pounds annually in dividends. But Berkshire does not pay dividends. Instead, it reinvests what it earns.
That is known as compounding – and could help me build my passive income streams over time even if I do not invest more money.
