How to earn passive income using the Warren Buffett method

Image source: The Motley FoolInvesting like Warren Buffett involves two things. The first is buying shares in great companies at decent prices and the second is being patient and allowing the investments to develop.These two principles combine to make a powerful force. And as Buffett’s investment in Coca-Cola demonstrates, they can be extremely effective for investors looking for passive income.Coca-Cola sharesBerkshire Hathway has owned its stake in Coca-Cola since 1994. At the time, the dividend yield wass around 5.75% and Buffett’s company received around $75m in the first year.That’s not bad, but over the last three decades, the investment has grown into something spectacular. Last year, Berkshire received $704m – a return of 54% on the initial outlay.From a passive income perspective, that’s a spectacular result. And it comes down to two things that are central to the Warren Buffett approach to investing – finding great businesses and being patient.Finding great businessesIn Buffett’s words: “If a business does well, the stock eventually follows.” The mean reason Berkshire’s investment in Coca-Cola has worked so well is because the business has two important characteristics.First, the company’s capital requirements are low. Only 14% of the $11bn the business produces through its operations gets used on capital expenditures leaving around $10bn as free cash.Second, the firm has a has a significant advantage over its competitors. Its powerful brands and wide distribution network allows it to bring products to market better than its rivals.Don’t be in a rushThe other part of Buffett’s approach is being willing to wait for opportunities. As he puts it: “The stock market is a device for transferring money from the impatient to the patient.”If Berkshire had paid twice as much for its stake in Coca-Cola back in 1994, the dividends it receives today would be 27% of the initial outlay, not 54%. That’s still impressive, but not nearly as good.Being patient also means being willing to hold investments for the long term. On average, Coca-Cola’s dividend has only grown by 8% per year – but over 29 years, that becomes something really significant.Story continuesUK dividend stocksAre there UK stocks investors looking for passive income could buy today to invest like Warren Buffett? Two that stand out to me from the FTSE 100 are Diageo and Unilever.Both have similar strengths to Coca-Cola in the form of strong brands and wide distribution. And both have increased their dividends steadily over the last decade.Perhaps most importantly, neither stock has had a good year so far. As a result, both Diageo and Unilever shares are close to 52-week lows.Time to buy and hold?The FTSE 100’s big consumer staples companies are some of the most resilient businesses around. But they’re subject to inflationary pressures and this is a risk investors will want to take seriously.It’s also noteworthy that neither Diageo (2.2%) nor Unilever (5.5%) has achieved 8% dividend growth over the last decade. So it isn’t obvious that they’ll achieve Buffett-like returns going forward.The real question, though, is whether there are better opportunities available at the moment. I’m not convinced there are, so I’m looking at both as stocks to consider buying for long-term passive income.The post How to earn passive income using the Warren Buffett method appeared first on The Motley Fool UK.More readingStephen Wright has positions in Berkshire Hathaway, Diageo Plc, and Unilever Plc. The Motley Fool UK has recommended Diageo Plc 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.Motley Fool UK 2023

Recommended For You