Image source: The Motley Fool
When it comes to passive income, all kinds of people have ideas. But few have actually created billion-dollar-a-year passive income streams. Warren Buffett has done it.
That proven ability is one of the reasons I'm inspired by Buffett when it comes to earning passive income.
Another is that he has shared much of his experience publicly, something I can learn from for free. I think it may be worth paying to learn how to be a more successful investor, but some free ideas are welcome too!
So if you wanted to put Buffett's views into practice with the goal of earning £1,890, on average, each month in passive income from share dividends, here's how you would do it.
Focus on quality at the right price
One way some investors try to earn a lot of income from stocks is by buying companies that offer a high dividend yield.
Sometimes that can pay off. But sometimes a high yield can be a warning sign that a dividend is expected to fall, and then it does.
A recent FTSE 100 the example is Vodafone. He announced this year that he plans to cut his annual dividend per share in half.
Buffett owns some high-yielding stocks. But when it comes to choosing them, he has said that he is looking for a great deal at an attractive price.
That seems smarter to me than just looking at performance. After all, no dividend is ever guaranteed.
what I would look for
In practice, what does that mean? Consider Unilever (LSE: ULVR) as an example. I think it demonstrates a lot of what Buffett looks for in an investment. In fact, he even tried to buy the entire company a few years ago.
Unilever has a large potential customer market that is likely to last. People will want to wash their clothes and shampoo their hair for the foreseeable future. It has created a set of premium brands that distinguishes it from its rivals and allows it to charge a higher price.
That helps the blue-chip company generate significant free cash flows to fund a quarterly dividend.
Will that last? One risk is that, in a difficult economy, shoppers will use supermarkets' own brands instead of paying more for them. Browse either Pigeon.
However, in the long term, Unilever is the type of company that I believe can help generate significant passive income. It has similar attributes to Buffett's holdings, including Coca Cola.
Aiming for an income goal
How could that help me aim for a monthly passive income of an average of £1,890? That's £22,680 a year. At Unilever's current dividend yield of 3.5%, that would require you to invest £648,000.
Can I start with less? a lot less? Investing in higher-performing stocks, without sacrificing the quality of the companies, could help me earn the same passive income and invest less.
The same could happen with capitalizing my dividends initially instead of withdrawing them in cash. That's what Buffett does at his company. Berkshire Hathaway. Reinvest profits.
For example, if I invested £1,000 a month with an average dividend yield of 7% and compounded those dividends, after 16 years I would reach my passive income target of almost £1,900 a month, on average.
