Building a passive income from ASX shares the Warren Buffett way

Buffett generates bucketloads of income from his portfolio each year.

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When it comes to wealth-building strategies, few names stand as tall as Warren Buffett. The Oracle of Omaha's legendary approach to investing has consistently yielded impressive results. You only need to look at the most recent Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) letter to shareholders to see this.

And while Buffett hates to pay dividends, he certainly loves to receive them.

This makes him a great investor to follow if you want to generate a passive income stream from ASX shares.

Let's take a look to see how anyone can build a Buffett-inspired dividend-focused ASX share portfolio with an eye on long-term growth.

Investing in high-quality ASX dividend shares

Warren Buffett is well-known for his love of quality and value. To set the stage for building a passive income, investors may want to focus on buying shares of companies with solid fundamentals, robust market positions, and a history of consistent dividend payouts. Think of household names like Coles Group Ltd (ASX: COL) or Telstra Group Ltd (ASX: TLS).

The power of long-term compounding

One of Buffett's most famous quotes is: "My favourite holding period is forever." It isn't hard to see why given the power of compounding. ASX shares have delivered an average total return of 9.6% per annum over the past 30 years. This would have turned a single investment of $50,000 in 1993 into almost $800,000 today. In addition, let's not forget the passive income you could now generate with a portfolio of this size. With an average dividend yield of 4%, a $50,000 investment would generate $2,000 of dividend income. Whereas a portfolio of $800,000 would be pulling in approximately $32,000 of income with a 4% yield.

You don't have to settle for average

While ASX's average dividend yield hovers around 4%, it's entirely possible to construct a portfolio with even higher-yielding dividend shares when the time is right. This is particularly the case within the banking sector, which Buffett has plenty of exposure to, which has historically been a key contributor to dividend income in Australia. Banks such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) typically offer above-average yields. Were you to generate a 5% yield on your $800,000, you would generate $40,000 of passive income.

Final word

To truly channel the Warren Buffett way, investors should adopt his patient and disciplined investment approach. Buffett's philosophy revolves around buying and holding quality assets for the long haul. The good news is that this mindset complements the goal of creating a passive income from ASX shares beautifully. The key is to come up with a plan and then stick with it for the long term.

Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has positions in and has recommended Coles Group and Telstra Group. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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