Warren Buffett has a straightforward proposition for you – figure out a way to earn passive income, or work until you die. He’s not wrong, but the good news is that it might be easier than you think.
I’m looking for an early retirement. And while my main focus at the moment is building wealth over time, I still find opportunities to make money while I sleep.
The stock market
The stock market is the vehicle I use to help me try and achieve my ambitions. Every month, I take part of my income and use it to buy shares in businesses.
The exact amount I invest varies, because my expenses aren’t quite the same throughout the year. Some months, I have annual memberships to renew, for example, and others I don’t.
Nonetheless, I always make sure I put at least some of my cash to work in places where I think it can earn a good long-term return. Or at least, a better one than I can get by keeping it in the bank.
After that, the businesses I own shares in go off and make money. And as an investor, I get to participate in this in a way that I couldn’t do by myself.
Dividends
Some companies look to use the cash they generate for things like opening new sites, or developing products. Others look to return it to shareholders as dividends.
Actually, it’s not quite as black and white as that. Most businesses do some combination of the two – reinvesting part of their earnings while returning the rest to investors.
Diageo (LSE:DGE) is one example. Over the last 10 years, the company has distributed around 62% of its net income as dividends – some firms have returned more, others less.
As a shareholder, I’ve benefitted from that in recent years. And when I get the cash, I can choose to take it as a boost to my monthly income, or use it to buy more shares (in Diageo or something else).
Opportunities
I’ve been adding to my stake in Diageo recently, but I always try to ask myself whether I’m doing the right thing. There are a lot of opportunities out there, so could I find a better one?
The company has some enviable assets. Its brand portfolio has leading products in a huge number of categories and the scale of its distribution gives it a big advantage over competitors.
Recently, though, the company has had to battle a number of challenges. And while a lot of them look like short-term issues, the rise in anti-obesity medication could be one of the biggest.
GLP-1s clearly have the potential to weigh on demand for Diageo’s drinks. But I think there are still a lot of unanswered questions about the affordability, availability, and scope of these drugs.
Making money while I sleep
I’m happy to keep adding to my stake in Diageo for the time being. And I’m very positive about the new CEO’s plan to unlock value through a series of divestitures.
Time will tell how that will go. But in the meantime, I’m happy to go to bed at night knowing that someone somewhere is probably buying a Diageo product and making me money in the process.
