Warren Buffett is one of the world's greatest investors. He's created a wealth of many tens of billions of dollars for himself, donated billions and led Berkshire Hathaway to become one of the world's biggest businesses. I think we can follow his example and build an appealing monthly passive income.
It's not as though he has been trying to invest in the world's riskiest technology companies. Between 1965 to 2022, Berkshire Hathaway built an empire with names like Coca-Cola, Geico (insurance) and BNSF (railways).
We don't need to invest in the same industries to do well. There are many different sectors to choose from on the ASX.
Compound returns
Compounding is an extremely strong financial force. It enables investors to grow their wealth without necessarily having to contribute all of the money ourselves.
While Warren Buffett has delivered average annualised returns of 19.8% within Berkshire Hathaway between 1965 to 2022, just delivering a return of say 11% per annum could grow wealth at a very attractive pace.
For example, investing $1,000 per month would grow into $200,000 after ten years if it is compounded at 11% per annum.
On the ASX, the company that is sometimes called Australia's Berkshire Hathaway is Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). It has delivered an average return per annum of 12.9% over both the last five and 20 years.
Soul Pattinson also has a diversified portfolio, and has been operating since 1903 – it has paid a dividend every year since then. The company has also grown its annual ordinary dividend each year since 2000.
I'm not suggesting that should be the only investment in a passive income-focused portfolio but it's a good one to consider as a core holding.
Warren Buffett investing
We can use a number of Warren Buffett's investment strategies to build a monthly passive income of $1,000.
For starters, I'd follow his advice about only investing in businesses that I'd be willing to own for a number of years. Long-term investing gives more time for compounding.
I would be greedy when ASX shares are down during a bear market and buy as much as my finances allow.
I'd only invest in companies that I understand, which have appealing outlooks, at a reasonable price.
$1,000 of monthly passive income
With the benefit of franking credits, I'd say that a portfolio average dividend yield of 5% is reasonable.
To get $1,000 of monthly passive income, we're talking about $12,000 annually, which would be a real boost to most people's finances. At a 5% dividend yield, we'd need a portfolio value of $240,000.
If I continue with the example of investing $1,000 a month and returning 11% per annum, it would take less than 12 years to get there.
What sort of ASX dividend shares could make returns of that level? I'd suggest that Soul Pattinson would be a good place to start. Bunnings and Kmart owner Wesfarmers Ltd (ASX: WES) is another business known for wealth creation and dividends.
Affordable jewellery retailer Lovisa Holdings Ltd (ASX: LOV) pays a decent dividend yield and it's rapidly growing its store count globally. Tech investment business Bailador Technology Investments Ltd (ASX: BTI) is the final ASX share I'll mention that's paying passive income and seeing strong underlying growth.
