I’d build passive income streams the same way Warren Buffett does. Story by Christopher Ruane
When it comes to passive income, there are quite a few things I like about simply buying shares in proven companies. I can benefit from the work of blue-chip businesses and can invest as little (or as much) as my financial circumstances at that moment allow. When investing for passive income, I have learnt some things from billionaire Warren Buffett.
Buying into brilliant companies Buffett looks for passive income in obvious places.
Most of his shareholdings are in large, well-known and long-established companies.
A lot of far less successful investors spend ages trying to find little-known firms they think could yet take the world by storm. Buffett, by contrast, is happy to buy shares in businesses that have already proven their business model and staying power over the course of decades. Take his holding in Coca-Cola (NYSE: KO) as an example. Buffett started buying into the company back in 1987 and completed his stake-building in 1994.
When he started buying those shares, Coca-Cola had been listed on the New York Stock Exchange for 68 years. It had already raised its dividend annually for over two decades (and has continued to do so ever since Buffett invested).
So the Sage of Omaha was not looking for ‘the next big thing’. He was buying into an existing big thing. Today his company, Berkshire Hathaway, earns over $700m annually in Coca-Cola dividends. That is over half of what it paid in total for the entire stake.
With a large customer base, proprietary brands and strong pricing power, Coca-Cola is a classic Buffett pick. It faces risks, such as increasing concern about sugary drinks leading many consumers to prefer healthier alternatives. But, for now at least, the sweetest thing about Buffett’s long-term Coca-Cola stake is its incredible financial rewards.
Investing for the long term Is it an accident that those rewards have built over the course of decades? No.
Warren Buffett is the epitome of a long-term investor. He says that if someone would not be willing to own a share for 10 years, they should not even consider owning it for 10 minutes.
Buffett’s Coca-Cola dividends have grown steadily for decades even though he has not added to his shareholding for 30 years.
As the old saying goes, over the long term, “quality in, quality out”.
Compounding dividends Although Warren Buffett has not bought more Coca-Cola shares since 1994, he has not used the massive dividend streams to pay dividends to his own Berkshire shareholders.
Instead, like all of Berkshire’s earnings, he has retained them to use in other ways, from buying different shares to taking over whole businesses.
We’re fund managers and these are the six big investment lessons we’ve learnt over the years Story by Rosie Murray-west
As the children across Britain sharpen their pencils and go back to school, there are some financial lessons that their parents can learn too.
We asked Britain’s foremost investment managers to share the most important ones they’ve learnt – and how they’ve put them into practice.
What are the most important investment lessons? We ask the experts by This Is Money
Lesson One: Too much debt just makes companies vulnerable
Early mistakes have led to caution for Richard de Lisle, who manages the VT De Lisle America Fund. He began his investment journey at just 16, only to lose his hard-earned pocket money on a risky bet.
‘I read everything on my paper rounds and did well from Patrick Sergeant in the Daily Mail and Jim Slater in The Telegraph. Those were my favourites. Yes, the Mail had a hand in my career.
‘The FT 30 had fallen more than half in two years. Stock prices were so low that I was seduced by the glamorous Court Line [a former shipping company that became a holiday provider]. It was leading the new package holiday boom, opening up the Spanish Costas to people who’d never been abroad before.’
Despite his tender years, De Lisle even looked at the valuation, including the price-earnings ratio, which shows how much profit a company is making per share. As a rule of thumb, the lower the ratio, the cheaper the company.
‘Its P/E ratio was under four; the yield was 17 per cent. What could go wrong?’ De Lisle asks.
Quite a lot, it turns out.
‘Five months later, Court Line went bust because of too much debt and I lost all my hard-earned cash. My friend’s father, who owned the fish and chip shop, did much better. He put everything he had into five blue-chip companies and more than doubled his money in six weeks.
‘Warren Buffett says that debt just speeds things up and so it does. Today we run a value-based fund. While we like cheap, we don’t like debt. Lesson learned.’
Lesson Two: You’re almost always wrong before you are right
For Laurence Hulse, who manages UK smaller companies’ specialist Onward Opportunities, an internship at Barclays Capital when he was 18 brought a lesson he has lived by all his life.
‘You’re almost always wrong before you are right. This was one of the first ‘lessons’ I was ever taught,’ Hulse says. During his time at Barclays under revered equity trader Howard Spooner, Hulse learned that because you do not usually time the market perfectly, your investment is likely to fall at first.
‘Other than in the unlikely event when you buy at the very lowest price or sell at the very highest price to the penny, you have got to be prepared to be wrong initially,’ Hulse says.
As a result of this lesson, he has learned not to make sudden swerves in his trading. ‘We very rarely trade into or out of a company in one transaction, as to do so would be to assume you have timed things perfectly.
Lesson Three: Work out whether you are investing…or gambling
John Husselbee, head of multi-asset at LionTrust, learned many of his investment lessons from his family.
‘My father taught me that whenever speculating at the racecourse or a casino, work out beforehand how much money you are prepared to lose betting, then put that amount in a separate pocket to treat as a sunk cost. Whatever is left in that pocket at the end of the day is your good fortune. However, if you have bad luck and your pocket is empty, never add to it – just walk away,’ he says.
From his grandfather, who bet on the horses as well as investing in shares, he learned the difference between investing and gambling.
‘Visiting my grandad on a Saturday morning, we would walk to the newsagent to buy a copy of the FT and the Racing Post. Back home, I would update the prices of Grandad’s shares in his ledger and calculate the profit/loss since purchase.
‘In the meantime, Grandad would study the form to select his bets for afternoon racing live on the telly. We would walk back to the newsagent; Grandad would give me pocket money for sweets and I would wait outside the bookies while he would place his bets.
‘The lesson learnt was the difference between investment and speculation – with the latter you need to be prepared to lose all your money!’
Lesson Four: It’s always darkest just before dawn
For a lesson he has never forgotten, Ian Lance, fund manager in the UK Value & Income team at Redwheel, casts his mind back to a despondent lunch in City of London oyster bar Sweetings, just as Britain was about to crash out of the European Exchange Rate Mechanism (ERM) in September 1992.
‘I calculated the payments on the mortgage my wife and I had taken out to buy our first home a few months earlier at the new interest rate of 12 per cent which the Government had just announced.
‘On finding that our payments were more than our combined salaries and the UK equity market was crashing, I headed down to Sweetings to drown my sorrows.
‘An hour or so later a colleague turned up and announced the stock market was soaring. The rest is history as Britain crashed out of the ERM, interest rates plummeted, and a new equity bull market began.’
What did he learn from this – apart from to take a long lunch now and then? ‘Markets look forward and will peer through the gloom to the sunlit uplands,’ he says. When all about you are despondent, it might be time for things to recover.
Lesson Five: You don’t know as much as you think you know
Jamie Ross, portfolio manager of Henderson Eurotrust, says that the facts available at our fingertips leave us more vulnerable than we know. The biggest lesson of his career, he says, has been that he always needs to focus on one important question when deciding whether to invest or not.
That question is: ‘What makes this a good company?’
‘It leads to all sorts of analysis, from understanding the competitive environment, to assessing pricing power to attempting to determine the sustainability of a company’s margins.’
Without this simple question, he says, it is easy to drown in information about a potential investment and to think you know everything about it.
‘Knowledge is not the same thing as understanding. Even experienced investors can sometimes miss the wood for the trees and suffer from familiarity bias – feeling more comfortable investing in something you ‘know’ lots about.
‘I think about this every time I start to work on a potential new investment.’
Lesson Six: Take the expert advice with a pinch of salt…
Edward Allen, investment director at Tyndall Private Clients, says that for all investment experts’ perceived wisdom they are ‘rarely cynical enough’, so you should never believe what you read from those who don’t have anything to lose from their predictions.
‘Economists and market forecasters have the luxury of being wrong. Investors do not,’ he points out.
‘Understand the biases of an author if you are going to follow their advice and remember that for every balanced, well-reasoned argument for doing something there will be many others for doing the opposite.
‘The investment world is perverse and often seemingly irrational.’
I’ve sold the portfolio shares in FSFL for a profit of £253.00 including the dividend earned but not received. The funds are earmarked for JLEN although trading at a slightly smaller yield, I feel more comfortable holding for the long haul.
A portfolio of shares to DYOR on. If u are growing your pot and time is on your side, u may be willing to take more of a risk and invest for growth and income. Better to have a dividend to re-invest when markets are weak.
If your pot of money has grown by compounding, u may be more interested in preserving your wealth by taking less risks with your money.
Above is a portfolio IT’s at the lower end of the risk spectrum, no share is entirely risk free but if u want a dividend to pay your bills or to re-invest, CTY have paid a gently increasing dividend for 52 years, so are unlikely to change their criteria, especially as they have reserves built up to pay their dividends when markets crash. LWDB could be a buy if/when the next market crash happens.
But as it’s your hard earned it’s always best to DYOR.
The manager says that BSIF also maintains a sizeable pipeline of assets. As of 31 December 2023, this stood at a total of 1,531MW, made up of 968MW of solar and 563MW of battery storage. As Figure 8 shows, this is broken down into various stages of development, noting that BSIF has a 5% investment limit in pre-construction development stage activities, of which less than 1% is currently committed.
Figure 9 highlights the current value of the construction projects and consented projects in the BSIF valuation. Currently, no value is attributed to projects without planning consent. The manager says that once developments receive planning consent and move from the development stage to pre-construction, the investment adviser believes it is appropriate to reflect this change in the company valuation. It says that at this point in their lifecycle, the projects will have received all the necessary planning consents, land rights and valid grid connection offers and so, it says, have discernible value beyond the direct costs of development.
Performance
The manager notes that of all the AIC investment trust sectors, renewable energy infrastructure has been one of the hardest-hit by the economic challenges faced by the UK over the last few years. In many cases, it says, a degree of repricing was justified given the extent of the inflation surge and the ensuing tightening of monetary policy which took place over 2022 and 2023. It says that many companies in the sector reliant on debt financing and without sufficient cashflows have seen their share prices fall dramatically, with median sector discounts at one point falling through 30%.
The manager says that for the most part, BSIF had managed to steer clear of the carnage, operating throughout this period with one of the narrowest discounts in the entire sector. It says this was a reflection of the resilience of the portfolio and the ability of its advisors to navigate what it says has been one of the most challenging and uncertain periods of the company’s 11-year history.
The manager adds that little has changed in that regard and says that the trust’s fundamentals have remained just as good as ever. Despite this, the manager notes that the discount has continued to widen, particularly since the end of 2023. Unfortunately, it says, there does not appear to be a particular catalyst driving the recent selloff. As shown in Figure 12, the company has outperformed its peer group median over the past 12 months, which the manager says suggests that the recent fall is driven more by market sentiment than any fundamental weakness.
Peer group comparison
You can access up-to-date information on BSIF and its peers on the QuotedData website.
There are now 22 companies that make up the AIC’s renewable energy sector, although we have removed the Asia Energy Impact Trust (formerly Thomas Lloyd Energy Impact) from our analysis, given that its shares were suspended for much of the past year.
The manager notes that of these companies, most are focused on solar or wind or some combination of the two; however, it says, there are several more-targeted funds which provide a different risk profile to BSIF. Three focus exclusively on battery storage assets. Three funds are focused on energy efficiency projects. Two funds invest exclusively in US projects, which it says tend to have long-term PPAs. One invests in hydrogen-related assets and has more of a capital growth focus.
The manager highlights that BSIF is a large, liquid fund, offering an attractive yield, adding that it has one of the most competitive ongoing charges ratios within the peer group.
The manager notes that BSIF has remained one of the most consistent performers in terms of NAV growth across the entire sector, both long-term and more recently. Notably, it says, the NAV performance has been steady despite the selloff in the company’s shares over the last 12 months, with the discount compounded by the 4.1% NAV return.
Dividend
BSIF pays quarterly dividends. For a given financial year, the first interim dividend is paid in February, with the second, third and fourth interims paid in May, August and October/November respectively (dividends are usually declared the month before payment).
In the 2023 financial year, BSIF paid a total of 8.6p, 0.2p ahead of the target dividend following a jump in its underlying earnings. The manager says that within its peer group, BSIF has consistently delivered the highest dividend on a pence per share basis (or euro equivalent).
The target dividend for FY24 has been set at not less than 8.8p, an increase of 2.3% on the total dividend for FY23. The manager notes that whilst this may look like a small uplift in the context of recent adjustments, the existing dividend remains one of the highest in the sector. In addition, it says, given current challenges present in funding markets, there are obvious long-term benefit to shareholders if BSIF balances underlying and carried earnings between dividend payouts and other uses of capital such as the development of its pipeline. The manager adds that the nature of the current discount presents an opportunity to buyback shares.
Premium/(discount)
The manager notes that this is the first period in the company’s history where it has traded at a sustained discount. Early in 2023, it says, a period of positive performance saw shares trade close to par before a sharp decline over the next 12 months resulted in the discount widening to 27% at the time of publishing. The manager says that the sell-off became particularly steep at the beginning of 2024. It says there is no clear fundamental justification for this move, which has gone well past the mechanical impact of rising rates.
The manager says that whilst this remains unfortunate for both the advisors and investors, it is not uncommon for markets to overshoot in either direction. It believes that given the ongoing execution of the trust, and the efforts of the advisory team to ensure the long-term health of its portfolio through strategies including the new GLIL partnership, investors should remain confident. that BSIF’s fortunes will improve.
Buybacks
The manager notes that the recent sell-off has prompted the BSIF board to announce a share buyback programme, to which an initial £20m has been allocated. This commenced following the publication of the company’s interim report on 28 February 2024. Going forward, the manager says that BSIF’s capital allocation policy is under regular review, with the marginal benefit of buybacks evaluated against the merits of further investment in its existing assets, pipeline, and debt repayment. For the moment, it says that buybacks remain an effective use of capital given current discounts.
Balance sheet
The manager notes that since its 2013 IPO, BSIF has focused on a simple and deliberate strategy of ensuring, outside of its revolving credit facility, that all debt within the structure is secured at portfolio level with fixed interest rates on fully amortising terms. As of 31 December 2023, the current average cost of debt is c.3.5% on £410m of long-term borrowings, which the manager says highlights that the company continues to be well insulated from today’s higher-interest-rate environment. Notably, it says, whilst BSIF has a modest amount of index-linked debt, it also has significant levels of RPI-linked revenues, leaving the company a net beneficiary of inflation.
At the group balance sheet level, BSIF has access to a £210m revolving credit facility and an uncommitted accordion feature that allows for a further £30m of borrowing. This facility matures in May 2025 and is provided by Lloyds Bank, RBS International, and Santander UK. The cost of this is 190bps over SONIA. As at 31 December 2023, the company had drawn £167m from its RCF. This is a reduction of £10m from our last note, which was published in October 2023 following a repayment stemming from the GLIL partnership.
Fund profile
BSIF is a Guernsey-domiciled sterling fund, with a premium main market listing on the London Stock Exchange (LSE). At launch on 12 July 2013, it focused primarily on acquiring and managing a diversified portfolio of large-scale (utility-scale) UK-based solar energy assets, to generate renewable energy for periods of typically 25 years or longer. BSIF owns and operates one of the UK’s largest diversified portfolios of solar assets, with a combined installed power capacity of 813MWp.
In July 2020, shareholders approved proposals to expand the remit and BSIF began making investments in onshore wind and energy storage projects soon after.
BSIF is designed for investors looking for a high level of income with regular distributions. Further information regarding BSIF can be found at: www.bluefieldsif.com
BSIF’s primary objective is to deliver to its shareholders stable, long-term sterling income via quarterly dividends. The majority of the group’s revenue streams are regulated and non-correlated to the UK energy market.
The underlying investments are held in SPVs which, in turn, are held through BSIF’s wholly-owned and UK-domiciled portfolio holding company, Bluefield Renewables 1 Ltd (BR1).
