Many people share the dream of earning a lifelong passive income in a world of financial uncertainties. However, without any savings to start with, this goal may seem distant, if not impossible, to achieve. That's where the wisdom of legendary investor Warren Buffett comes into play.
Known for his simple yet profoundly effective investment philosophy, Buffett's approach can be adapted by anyone looking to make their way into the world of investments.
Warren Buffett, often referred to as the "Oracle of Omaha," has built his fortune through making wise investments in undervalued companies with strong business models and potential for long-term growth.
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Save, educate, and invest
For individuals starting from scratch, the first step towards employing the Buffett method is saving money. Buffett is known for his frugality. He still lives in the same house he bought in 1958 and enjoys McDonald's breakfast. By leading a simple and frugal lifestyle, you can achieve two goals: better focus on important things in life and creating the initial capital to invest.
The second step, or what you can do in parallel, is education. In the early days, Buffett used to read the Moody's Manual, a thick book introducing all listed shares, one company per page, from A to Z, twice.
He emphasises understanding the businesses you invest in. This means looking beyond share price fluctuations and focusing on the company's fundamentals, such as its competitive advantages, management quality, financial health, and potential for growth.
What to consider in choosing ASX dividend shares
Patience is crucial when using the Warren Buffett method. Buffett is known for his long-term investment strategy, often holding onto his investments for decades. Dividend-paying stocks can be a great way to achieve this long-term investing goal.
Buffett's investment vehicle, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), collects billions of dollars in annual dividends from a handful of companies, including Bank of America Corp, Occidental Petroleum Corp, and Apple Inc.
In his 2022 shareholder letter, Buffett highlighted:
In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.
The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow.
American Express is much the same story. Berkshire's purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.
ASX dividend shares
Once you have saved some money to invest, it is time to look for ASX dividend shares similar to Buffett's. For this purpose, I looked for ASX companies with a solid dividend history, robust business fundamentals, and inexpensive valuations.
- Washinton H Soul Pattinson (ASX: SOL) has increased its dividends for more than a decade. Currently offering a fully franked dividend yield of 2.6%, it is one of the most loved ASX dividend shares.
- BHP Group Ltd (ASX: BHP) boasts a dividend yield of 5.5% after the recent weakness in its share price. While the near-term outlook is murky, the mining giant has a time-tested history of dividend payments.
- Steadfast Group Ltd (ASX: SDF) is a leader in the insurance broking industry, with a current dividend yield of 2.5%. Its earnings and dividends have demonstrated consistent growth year after year.
- Brickworks Limited (ASX: BKW) shares currently offer a fully-franked dividend yield of 2.3%. Based on management estimates, they are valued below the company's net asset value (NAV).
While the first step can be daunting, let's remember that Buffett made his first stock purchase—three shares of Cities Service preferred shares at $38 per share—when he was 11.
