Rome wasn’t built in a day, and neither is a substantial passive income stream. For investors, building this usually requires time, commitment, patience, and smart decision-making along the way.
Warren Buffett embodies this long-term approach. With decades of investing experience under his belt, he’s steadily grown his own wealth, as well as that of his company’s shareholders.
Here’s one lesson I’d take from Buffett if I were just starting out on my investing journey today.
Find deep moats
For decades, the Oracle of Omaha has recommended investing in businesses with strong ‘moats’ (competitive advantages) and few rivals.
Over the years, [Buffett] followed his philosophy of buying into industries with little competition. If he can’t buy a monopoly, he’ll buy a duopoly. And if he can’t buy a duopoly, he’ll settle for an oligopoly.
The Myth of Capitalism by Denise Hearn and Jonathan Tepper
We can see this in the investment portfolio of his company Berkshire Hathaway. It holds Coca-Cola, which is part of a global duopoly in the soft drinks market, along with PepsiCo. It owns shares in Visa and Mastercard, which together form a dominant duopoly in payments processing.
Berkshire’s also a long-time shareholder of Moody’s, a credit ratings agency that shares an effective duopoly with Standard & Poor’s. And it owns several utility companies that operate as regulated monopolies.
Dominating a growing niche market
While no dividend is guaranteed indefinitely, I do like to see a solid track record from dividend-paying companies. Coca-Cola, for example, has increased its annual payout for more than 60 years!
One UK stock that I reckon fits the bill is Games Workshop (LSE: GAW). This is the creator of the hugely popular fantasy game Warhammer, which has a dedicated and growing global fanbase.
Games Workshop has spent four decades constructing rich fictional worlds that are almost impossible to replicate. Importantly, this enables the company to leverage various licensing partnerships, most notably through video games, comic books, and TV content.
The big development on the licensing front recently has been a deal with Amazon Studios. This aims to bring Warhammer content to Amazon Prime, which has over 200m subscribers globally. The partnership could attract many new fans to the Warhammer franchise.
As things stand though, the two sides are still hammering out the creative details. So nothing is certain.
Decent dividend yield
Whether or not the deal comes off, incredible loyalty among customers is likely to endure. That’s because many fans spend hours painting their collectible miniatures, making the activity a labour of love.
Add in the real-world tournaments, which provide a sense of community, and this gives the firm a unique competitive position, in my opinion.
That said, it’s not a cheap hobby,as the cost of building an army is in the hundreds of pounds. So there’s a risk the company pushes its pricing power too far, potentially forcing customers to seek out 3D-printed replicas.
The stock also trades at a premium, though I think that’s warranted considering how profitable Games Workshop is (29% profit margin).
I think this could be a fantastic choice to build passive income in the years ahead. The firm has an excellent record of growing its dividend and the starting yield today is 3.6%. I plan to hold my shares for years.
