Forget high yields? Here’s the smart way to build passive income with dividend shares
For those who are looking to make money while they sleep, dividend shares can be a great choice. But what separates the good ones from the great ones?
According to Warren Buffett, the best stocks are ones that pay out more to investors over time. Finding these can be the difference between doing well and earning huge passive income.
Buffettâs secret sauce
Coca-Cola and American Express have been two of Berkshire Hathawayâs best income investments. And in the 2023 shareholder letter, Buffett outlined why this has been the case.
According to Buffett, the reason is that the companies have been able to grow their earnings over time. As a result, they now pay bigger dividends than they used to.
Even with companies that donât grow, investors can reinvest the dividends they receive to compound their returns. And this can be a powerful strategy over the long term.Â
The best investments, though, are ones that return more cash each year without someone buying more shares. Thatâs what has happened with Coca-Cola and American Express.
With Coca-Cola, the company has gone from returning $75m to Berkshire in 1994 to $204m in 2025. And thatâs without Buffettâs team buying any more shares.
The business has continued to grow while Berkshire has been able to invest the cash in other opportunities. Thatâs why itâs been such a good passive income investment.
What about now?
Are there any companies like Coca-Cola that investors can buy today? I think there might be â and there might even be some on the UK stock market.
Informa (LSE:INF) is one example. The FTSE 100 company might not be a household name, but thereâs a lot to like about it as a business that can generate passive income for investors.
The company is in the events business. Specifically, it organises trade shows and conferences for various different industries, from concrete products to luxury yachts.
Importantly, the firm has relatively low capital requirements. It doesnât own the venues its events are held in and this means it doesnât have the associated maintenance expenses.
This kind of business can be vulnerable to economic downturns. And that means the potential for increasing tensions or even a full-blown international trade war is a significant risk.
Informa, however, has shown itself to be a resilient business. Itâs been growing strongly since the end of the Covid-19 pandemic and I think there could well be more to come.
Capital efficiency
Companies with low capital requirements often make for good investments. But this is especially important for dividend investors looking for passive income.
Reinvesting dividends is one way of growing a portfolio. The best companies, though, return more cash to shareholders without needing additional cash from investors.
One example is Informa, which has relatively little in the way of equipment to maintain. Thatâs why I own it in my portfolio and plan to keep adding to it in the future.
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American Express is an advertising partner of Motley Fool Money. Stephen Wright has positions in Berkshire Hathaway and Informa Plc. The Motley Fool UK has recommended Informa 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.
