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When it comes to profits, Warren Buffett put on a masterclass that spanned decades. His company, Berkshire Hathawayhas major positions in world-class businesses such as an apple, Coca-Colaagain Bank of America. Each pays a regular dividend to Berkshire.
Indeed, Coca-Cola alone now pays Buffett's company nearly $800m per year with assignments. The Oracle of Omaha hasn't lifted a finger to reduce that position since it started building it in the 1980s.
Now, that number is more than a humble investor like me could ever hope to achieve. But I can still follow certain aspects of Buffett's investment method to build a large income.
Think long term
Buffett's philosophy is based on a long-term mindset. We can see this in that position of Coca-Cola, which has been held for decades. His best time to catch “forever“.
One of my favorite Buffett quotes is: “Man sits in the shade today because man planted a tree long ago.” A tree does not appear overnight and wealth will not appear for most of us.
But if I invest £500 a month and earn an average return of 10%, I could end up with £1m in just under 30 years. That assumes I reinvest the earnings to really compound the fuel and generate a 10% return.
It's not guaranteed – dividends or that return – but it's a realistic target, in my eyes. Buffett's long term average almost doubled!
Focus on businesses that are truly profitable
A quick scan of Buffett's portfolio reveals that almost every company is highly profitable. That is obviously important for income as I can't rely on weak firms for reliable dividends.
One stock from my portfolio that offers a really high dividend yield is British American cigars (LSE: BATS). It currently sits at 8.6%.
Yesterday (25 July), the company reported that its half-year revenue fell by 8.2% to £12.3bn, driven by the sale of its businesses in Russia and Belarus last year and foreign exchange. Profit fell 28% to £4.26bn due to cost-cutting costs related to its US products.
Obviously, none of this sounds good. And the growth of its New Categories section, which stocks non-smoking products such as Wake up vapes and Velo nicotine pouches, hampered by the proliferation of illegal single-use vapes. So that's an ongoing risk here.
Yet the company remains a lucrative, cash-generating business with leading tobacco brands such as Dunhill again Lucky Strike. And its smokeless brands now make up 17.9% of group revenue, up from 16.5% in H1 2023.
To my eye, the meat profit yield looks sustainable, which is why I own the stock.
Taking a stand
Now, I should point out that while Buffett praises the economics of the tobacco industry, he does not invest in tobacco stocks. However he invests in oil stocks, with Chevron again Occidental Petroleum being the two largest places in Berkshire.
Some investors will not invest in tobacco or oil for ethical reasons. And that's good, as all investors will eventually draw their own lines.
Whatever these values may be, however, I think that focusing on highly profitable companies with proven business models will lay a solid foundation for increased revenue and wealth. Time and consistency are the other things I need.
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