The Motley Fool

I’m seeking passive income the Warren Buffett way

Image source: The Motley Fool

Passive income is money I can get without working for it. I don’t need to work to set up a new income-generating business as passive income can be as simple as dividends received from shares in which I invest.

Warren Buffett is famous as an investor. And he’s also a role model in how to set up passive income streams. My aim is to earn passive income following Warren Buffett principles.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Benefit from embedded value

Buffett once said that “someone’s sitting in the shade today because someone planted a tree a long time ago.”

His investment in Coca-Cola is a case in point. The brand has enjoyed heavy marketing investment for decades, which helps drive demand now. It has built brand loyalty. That helps to give the company pricing power. Investors in the company today are benefiting from value that has been embedded in the company over decades.

Buffett spent years as a director of the firm, so Coca-Cola’s dividends weren’t purely passive income for him. But I would look to use the same principle. For example, I could invest in branded drinks manufacturer Diageo. Like Coca-Cola, its brands such as Johnnie Walker and Guinness have been built over a very long time. That has engendered brand loyalty. With a dividend yield of 2.1%, if I put £10,000 into Diageo now I’d expect to generate over £200 a year in passive income, as long as the dividend is maintained.

Of course, Diageo has risks, which include any sales decline from a fall in alcohol consumption and the vulnerability of premium pricing to an economic downturn, but the principle still works.

Making the most of opportunities

Buffett is well known for long periods of share-buying inactivity. And during the past year of frenetic stock market activity, he’s been notable mostly by his absence.

That’s because he’s happy to wait for what he sees as better-than-normal opportunities.

Consider this Buffett nugget: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”.

We see that applied to his approach to passive income. For example, during the financial crisis, he struck a deal to help fund Goldman Sachs. Part of that involved buying preferred shares paying a 10% dividend. Buffett put out the bucket and invested $5bn.

He later said: “It’s been pointed out that our preferred is paying us $15 a second. So as we sit here, tick, tick, tick, tick, that’s $15 every tick.”

Passive income principle

That was an incredible result, although it reflected the risks associated with some financial services providers during economic downturns. 

The chance to make passive income like that won’t be open to most investors. But I think I can still learn from the principle Buffett espouses here.

Instead of investing in passive income opportunities that look just okay, I would wait until something comes along that seems excellent to me. If that means I need to wait a year or two to start generating money from that passive income stream, I’ll wait. But then, when I uncover an opportunity I think looks especially promising, I’ll “put out the bucket”.

However, while I want to make the most of opportunities, even what looks like a good investment can go bad. So, like Buffett, I’d be sure to diversify my holdings.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

christopherruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.