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Warren Buffett famously said, “If you don’t find a way to make money while you sleep, you will work until you die”.
While this can specifically apply to retirement, its broader meaning is about aiming for financial security at any point through income-generating assets like dividend stocks. In other words, passive income, which can flow in even when one is sleeping.
Here’s my simple plan geared towards achieving this goal.
Focus on the long term
Rome wasn’t built in a day, as the old cliché goes. It’s going to take time to construct a portfolio large enough to generate sizeable passive income.
To me, then, 2025 is just another year of building up my portfolio. This Foolish perspective helps me avoid taking unnecessary investing risks.
The opposite to this approach is to try and make as much money as quickly as possible. But this might lead me towards meme stocks, pre-revenue penny shares, and other high-risk/high-reward ideas.
Ironically though, following this get-rich-quick strategy means I could end up with far less than I started with. As Buffett also famously said, “Rule number one: never lose money. Rule number two: Never forget rule number one“.
Diageo on the rocks
The ‘Sage of Omaha’ invests in dividend-paying companies with strong brands, healthy profit margins, and pricing power. One FTSE 100 stock that I think ticks these boxes is Diageo (LSE: DGE).
A global leader in premium spirits, the company owns timeless brands like Tanqueray, Johnnie Walker, Gordon’s, and Guinness. Diageo has been able to steadily raise the price of these drinks over many years, supporting its healthy profit margins.
However, the firm has been impacted by a slowdown in the global spirits market, with many consumers cutting back on restaurants and nights out (thereby drinking less). There’s also been some downtrading to cheaper brands in its Latin American markets.
We don’t know how long this will last and things could get worse before they get better.
Meanwhile, weight-loss drugs have been shown to supress the desire for alcohol. Veteran fund manager Terry Smith (aka ‘Britain’s Warren Buffett’) dumped his Diageo shares last year partly because of this fear.
Over three years, the Diageo share price has dropped 39% due to this unpleasant cocktail of issues.
Buying the fear
Be fearful when others are greedy and greedy when others are fearful.
Warren Buffett
Recently, there’s been above-average share price volatility when companies report some operational or earnings setbacks. I’ve seen this with the stocks in my own portfolio.
For example, Novo Nordisk, the maker of Wegovy and Ozempic, suffered a 28% share price plunge in December after disappointing late-stage trial results for its next-generation weight-loss treatment. This was Novo stock’s sharpest drop ever! The month before, AstraZeneca stock fell 13% in a couple of days.
However, I still view these companies as high quality, including Diageo. The spirits supremo is now offering a 3.6% forward yield and I think the long-term income growth prospects remain strong (though dividends are never nailed on). The concern about weight-loss drugs looks a tad overblown to me.
My plan this year is to buy the fear whenever my favourite dividend-paying stocks suffer big share price pullbacks. By doing so, I hope to maximise passive income over the long run.
