Warren Buffett at a Berkshire Hathaway AGM Provided by The Motley Fool
How to earn passive income using the Warren Buffett method
Story by Stephen Wright
Investing 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.
Coca-Cola shares
Berkshire Hathway has owned its stake in Coca-Cola since 1994. At the time, the dividend yield was 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 businesses
In 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.
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 rush
The 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.
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