Warren Buffett has turned Berkshire Hathaway into a formidable business empire. And dividend stocks, such as Coca-Cola and American Express have been a big part of this.
I think the principles the Oracle of Omaha uses in investing apply at any time. But in a couple of cases, they might be especially important in 2024.
Seizing opportunities
When it comes to stocks, a central part of Buffett’s approach involves exploiting opportunities that can be found in times of extreme stress. American Express is a great example.
Back in the 1960s, the company was facing significant losses due to loans made during a major fraud by the Allied Crude Vegetable Oil company. It became known as the salad oil scandal. Buffett took advantage of the downturn in American Express stock to buy 5% of the company.
The results have been spectacular – Berkshire’s stake now returns over $302m per year in dividends. And this continues to grow as the firm reduces its outstanding share count.
The stock market can often overreact to short-term news – both positively and negatively. And seizing opportunities when share prices are irrationally low is a core part of Buffett’s approach.
Focus on quality
His strategy isn’t just about buying cheap shares though. There have been plenty of chances to buy stocks at discount prices that the Berkshire CEO hasn’t looked to take advantage of.
In fact, seeking bargains probably isn’t even the most important part of Buffett’s strategy. Instead it’s an unrelenting focus on high-quality businesses.
That means companies that generate impressive returns on the capital they use in their operations. It also means businesses with a ‘moat’ that protects them from competitors.
Buffett’s investment in Apple is a great example. The company’s services division generates huge cash flows and switching costs for customers help the firm defend its market position.
Passive income
In terms of Berkshire Hathaway, Buffett’s aim is to grow the value of the business. But I think the same principles are applicable to investing in dividend stocks for passive income.
When share prices fall, dividend yields rise. And that can create some attractive opportunities to lock in high yields by buying shares when others are concerned about short-term headwinds.
Equally though, a high dividend yield is no good if the company won’t be able to maintain its payouts. That’s why focusing on quality companies is key to recurring passive income.
By sticking closely to these ideas, I’m hoping to make investments today that can help me earn passive income for years to come.
A UK stock
One example is Burberry (LSE:BRBY). Things haven’t gone well for it over the last 12 months as a rising cost of living and higher interest rates have dampened demand for luxury goods.
This has been happening globally, causing a sharp drop in operating income and a profit warning only last week (12 January). The share price has fallen by almost 50% over the last 12 months.
There’s a risk its problems might continue for some time, especially in the Americas and South Korea. But with the dividend yield closing in on 5%, I think it’s worth taking another look.
Over the long term, I fell the company’s brand strength and growing target market could make this a great opportunity. That’s why I’m thinking seriously about buying the stock myself.
