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When it comes to dividends, Warren Buffett has given a decades-long masterclass. His holding company, Berkshire Hathawayhas massive positions in world-class companies such as Apple, Coca Colaand Bank of AmericaEach of them periodically pays a dividend to Berkshire.
In fact, Coca-Cola alone now pays Buffett's firm nearly $800 million. by year On dividends, the Oracle of Omaha has not moved a finger to reduce that position since he began building it in the 1980s.
Now, that figure is far beyond what a humble individual investor like myself could hope to achieve, but I can still follow certain elements of Buffett's investment methodology to generate a sizable passive income.
Think long term
Buffett's philosophy is based on a long-term mindset. We can see this with his position in Coca-Cola, which he has held for decades. His ideal holding period is “forever“.
One of my favorite Buffett quotes is: “Someone is sitting in the shade today because someone planted a tree a long time ago.“A tree doesn’t appear overnight, and for most of us, neither does wealth.
But if I invest £500 a month and get an average return of 10%, I'll end up with £1m in just under 30 years. That's assuming I reinvest the dividends to really boost compounding and generate a 10% return.
Neither of these things are guaranteed (neither dividends nor that return), but it is a realistic goal in my opinion. Buffett's long-term average is almost double that!
Focus on truly profitable businesses
A quick look at Buffett's portfolio reveals that almost every company generates a lot of profit. Obviously, that's key for passive income, as I can't rely on flimsy companies to deliver reliable dividends.
One stock in my own portfolio that offers a truly massive dividend yield is British American Tobacco (LSE: BATS). It currently stands at 8.6%.
Yesterday (25 July), the company reported that its half-year revenue fell 8.2% to £12.3bn, boosted by the sale of its Russian and Belarus businesses last year and currency headwinds. Profits fell 28% to £4.26bn due to write-down charges related to its US brands.
At first glance, none of that sounds great. And the growth of its New Categories division, which includes smoke-free products like Vuse vapers and Veil The rise of single-use e-cigarettes is hampering the growth of nicotine pouches, so this is an ongoing risk.
However, the company remains a high-margin, cash-generating business that owns leading cigarette brands such as Dunhill and Stroke of luckAnd its smoke-free brands now account for 17.9% of the group's revenue, up from 16.5% in the first half of 2023.
In my opinion, the substantial dividend yield seems sustainable, and that is why I own shares.
Taking a stand
Now, I should point out that while Buffett admires the economics of the tobacco industry, he doesn't invest in tobacco stocks. He does, however, invest in oil stocks, Chevron and Western Oil being two of Berkshire's largest holdings.
Some investors will not invest in tobacco or oil for ethical reasons, and that is fine, as each investor will ultimately draw their own lines.
However, whatever these standards are, I believe that focusing on highly profitable companies with proven business models will lay a solid foundation for growing income and wealth. Time and consistency are the other things I need.
