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Passive income investing: 2 pieces of advice from Warren Buffett

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close-up photo of investor Warren Buffett
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Generating income via dividends from stocks is one of the most appealing ways for me to build wealth. There are plenty of ideas out there to look at for passive income investing. And in this regard, I often listen to Warren Buffett’s pearls of wisdom. I tie his ideas in to dividend stocks and income investing, to help me hopefully pick the best ones to reach my goals.

Playing the long game

As someone who has been investing successfully longer than I’ve been alive, Warren Buffett is clearly someone to listen to. As it turns out, longevity is one of the things that makes passive income investing work. Buffett once said that “someone’s sitting in the shade today because someone planted a tree a long time ago.”

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What he meant by this is that good things can take time to happen, but the end result is well worth the time. It’s the same with getting dividends from stocks. For example, I might be aiming to make £1,000 a month in passive income. With a small pot to begin with, this isn’t going to happen overnight. 

I’ll have to regularly invest small amounts so that over several years, my investment pot will be large enough to give me a yield to equate to £1,000 a month. But once I’ve got there, it’ll be worth the wait.

Looking for sustainable passive income 

Warren Buffett once commented that “risk comes from not knowing what you’re doing”. This can be applied to many situations in investing, especially when targeting passive income. 

The tendency for a new investor might be to simply buy shares in companies that have the highest dividend yields. If it was me, I might reason that I’d  get the highest income that way. 

In reality, companies with the highest dividend yields often carry the highest level of risk of a dividend cut. This is because the yield could look high just because the share price is falling. After all, a lower share price makes the dividend per share a larger proportion overall. If I didn’t know this or hadn’t done my research on the share price, I could make a bad call here.

To deal with this, I just need to make sure I’m not focused solely on the monetary dividend values for passive income investing. It also needs to be about the company. What are the prospects for 2021? How has the business coped with the pandemic? In this way, the dividends I get paid will be more sustainable, even if it means taking a slightly lower dividend yield.

Overall, by looking at the thoughts of Warren Buffett, I can give myself a better shot at making my passive income investing strategy a success.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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