Warren Buffett’s ‘secret sauce’ for passive income investors
Dividend shares can be a great source of passive income, but investors have a dilemma on their hands. High yields are often risky, but strong prospects typically bring lower starting returns.
Fortunately, billionaire investor Warren Buffett has a way out of the difficulty. But itâs only available for investors who are able to take a long-term approach and wait for returns to develop.Â
The secret sauce
Buffett doesnât explicitly focus on dividends. But itâs no secret that some of the Berkshire Hathaway CEOâs most successful investments have been great sources of passive income.
An obvious example is Coca-Cola. As of 2025, the company returns over 50% of Berkshireâs initial $1.3bn investment in cash each year.Â
Unfortunately, this hasnât happened overnight. Itâs taken around three decades, but the results have been spectacular and highlight the value of taking a long-term approach to investing.
Buffett attributes this to one thing â growth. The starting yield was around 5.5%, but years of consistent growth has resulted in an investment that generates huge annual returns.
Importantly, Buffettâs firm hasnât reinvested its dividends to buy more shares. The growth has all come from Coca-Cola, providing opportunities to invest the cash it generates elsewhere.
This is the real key to the success of Berkshireâs investment. And I think there are a few stocks worth considering at the moment that might have the secret sauce Buffett identifies.
InterContinental Hotels Group
FTSE 100 hotel chain InterContinental Hotels Group‘s (LSE:IHG) one example to consider. The company’s grown its revenues by 12.5% a year over the last decade using almost no cash to do so.
The key to this is the firmâs business model. It doesnât own the hotels in its network outright, but operates franchise agreements with owners who benefit from its marketing and booking support.
This means the cost of IHG adding new hotels is almost zero. As a result, the company’s able to return almost all of the cash it generates to shareholders.
The dividend yield’s only 1.4%. But share buybacks mean investors can earn an extra 4.5% a year by selling shares without reducing their stake in the overall business.
There are â as always â risks to consider. The possibility of a trade war leading to a global recession could cause travel demand to fall, weighing on the companyâs profits in the short term.
Importantly though, the stock has fallen 8% in the last six months. So this might be an unusually good time for investors to take a look at a potential buying opportunity.Â
The Buffett method
The success of Buffettâs Coca-Cola investment should be a great inspiration for dividend investors. Itâs the result of finding a great business and holding shares for the long term.Â
After an 11% decline since the start of the year, IHG’s worth paying attention to. Its business model gives it the ability to grow while distributing the majority of its cash to shareholders.Â
In terms of passive income, the returns are unlikely to be spectacular in the short term. But that was the case with Buffettâs Coca-Cola investment back in 1990.
The post Warren Buffett’s ‘secret sauce’ for passive income investors appeared first on The Motley Fool UK.
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Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has recommended InterContinental Hotels Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
