Warren Buffett has never been an investor who focuses on generating a passive income. However, this doesn’t mean his investment principals, that have delivered significant returns over the years, are obsolete when seeking to make an income from UK shares.
In fact, by focusing on the quality of a company prior to purchase, as well as its long-term prospects, it’s possible to build a more attractive and robust income over the long run. This could be especially relevant in today’s stock market, where uncertainty is high.
Warren Buffett’s focus on high-quality stocks
The quality of a company has usually formed the centrepiece of his investment strategy. Clearly, defining whether a specific stock is high or low quality is subjective. However, for Buffett, it centres on a competitive advantage.
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For example, a business that has unique products or strong brand loyalty is likely to have an advantage versus peers selling generic products unvalued by consumers. It may be able to charge higher prices, generate larger margins, and produce higher levels of profit growth. Ultimately, this may mean higher dividends for passive income investors.
Warren Buffett’s focus on quality could be especially relevant at the present time. Many industries are facing very difficult operating conditions right now. This could mean those companies with clear competitive advantages have more resilient dividends. Alongside a better chance of growing in the coming years. This may lead to a more generous passive income.
A long-term view of dividends
Dividend investors can sometimes focus too much on short-term passive income opportunities, rather than long-term income streams. For example, they may purchase the highest-yielding shares they can find for 2021 without considering whether those dividends are likely to grow in the long run. Eventually, they may be left with a passive income that fails to grow by more than inflation.
Warren Buffett’s focus on the long term could therefore be worth following. His formula is to outperform the stock market over a period of many years, and even decades. By adopting the same standpoint, it’s possible to look beyond the short-term appeal of high yields. Investors could then consider the affordability of dividends and how quickly they can grow. This may ultimately lead to a larger income in the long run.
Of course, it’s important for many investors to obtain a generous income return in the current year. Therefore, there’s likely to be a minimum required yield that makes a stock worth buying in order to produce a sufficient passive income.
However, by also factoring in the prospects for dividend growth, it’s possible to combine a worthwhile yield today with the prospect of an inflation-beating income return. That could happen as the world economy recovers over the coming years.
