Story by Zaven Boyrazian, CFA

Few investors come close to matching the exceptional track record of billionaire Warren Buffett. The ‘Oracle of Omaha’ has steered his investment firm to generate close to a 20% average annualised return since the 1960s. So it’s no surprise that when Buffett gives advice, investors listen… carefully.

And with the cost of living continuing to rise, his previous tips about the need to earn passive income are now more relevant than ever. After all, “If you don’t find a way to make money while you sleep, you will work until you die”, he famously said.

With that in mind, here’s how any investor can immediately start earning a passive income overnight.

The power of dividends

While many investment portfolios tend to be geared towards growth, it’s easy to overlook mature, boring dividend-paying stocks. After all, why would you invest in a dull self-storage enterprise when there are bleeding-edge biotechs curing cancer?

However, despite the lack of excitement and attention, income stocks nonetheless drive the bulk of shareholder returns over the long run. And that’s especially true for UK shares, which offer some of the most generous dividends in the world.

So how do investors tap into all this passive income potential? It’s simple. All they need to do is buy shares in a dividend-paying company, and wait for the money to come rolling in (usually once every quarter).

But is it really that simple?

Risk versus reward

The most lucrative dividend stocks over the long run aren’t necessarily the ones with the highest yields today. Instead, it’s the businesses that generate exorbitant volumes of consistent free cash flow that not only fund shareholder payouts but also enable them to grow over time.

That’s a lesson Buffett has learned first hand with his investment in Coca-Cola (NYSE:KO). The soft drinks giant has used its consistent and steady cash flows to increase dividends every year for 63 years in a row. And consequently, Buffett’s now earning more than a 60% yield on his original investment in the late 1980s.

Does that make Coca-Cola a no-brainer today?

Sadly, past performance doesn’t guarantee future results. And if investors blindly buy previously successful income stocks without investigating the underlying risks or potential rewards, their passive income could quickly disappoint.