Warren Buffett is the legendary investor and CEO of Berkshire Hathaway. He’s renowned for his wealth and investing prowess. With a net worth of over $100bn, he knows a thing or two about generating a second income. So, here are his best tips, adapted to help us generate £2,400 annually in passive income.
He likes index funds
One of Buffett’s top pieces of advice for passive income seekers is to invest in low-cost index funds. This is a type of mutual fund that tracks a market index like the FTSE 100 or S&P 500, but doesn’t charge crazily high commissions or annual fees. A popular fund like the Vanguard FTSE 100 UCITS ETF has an ongoing charge of just 0.09%. The fund itself is passively managed and invests in the stocks or bonds within that index.
The key benefit of index funds is that they provide instant diversification and require very little maintenance. That said, Warren Buffett tends to recommend investing regularly in an S&P 500 index over a FTSE 100 fund to steadily build wealth over time. After all, US-based Buffett is known for investing in American businesses.
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But in order to generate £200 a month in passive income, investors would need to build up a sizeable index fund portfolio. Investing £500 to £1,000 per month into an index fund could get investors there within five to 10 years.
Picking big payers
Another one of Warren Buffett’s go-to passive income strategies is dividend stock investing. These are stocks that pay out regular dividends to shareholders. For instance, the Oracle of Omaha loves Coca-Cola in part because of its steady dividend payout.
But for those who are more interested in UK shares, I think the likes of British American Tobacco or Taylor Wimpey are good shouts considering their hefty and reliable dividends.
Either way, Buffett reiterates that it’s important to focus on buying shares in high-quality companies with stable earnings and a history of increasing dividend payouts every year. The trick is to reinvest those dividends to buy more shares and create a snowball effect.
From this, £200 per month in dividends is achievable with a diversified portfolio of dividend stocks. However, investors should also note that this can only be achieved through disciplined investing.
Diversify the stream
Instead of relying on just one stream, Warren Buffett advises building multiple streams of passive income. This provides more stability and diversification. For example, more risk-averse investors may want to invest 50% of their money in index funds, 35% in dividend stocks, and 15% in growth stocks or cash.
With these sources of passive income adding up, reaching £200 per month becomes much more achievable. Nevertheless, the key to achieving this is patience and persistence. As Buffett once said: “The rich invest for income, the poor invest for capital gains“. As such, investors may be better off following his lead and letting the compounding work its magic.
