Live Comfortably: The Warren Buffett Way of Generating Passive Income with No Savings

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The billionaire prefers to source funds through share buybacks instead of dividends.

When ASX investors think of reliable passive income, dividends are usually the first thing that comes to mind. Unfortunately, it may be hard to come up with another form of consistent passive income from shares without selling them. Enter Warren Buffet – the legendary investor who has an answer to this puzzle!

Despite not paying dividends, the multi-billionaire company Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) still provided its shareholders with copious passive income opportunities.

Is this possible? It’s simple – share buybacks.

According to Buffett, who voiced his opinion in 2004, he believes that a company should be investing its extra cash into repurchasing its own shares.

“If you are going to have money and just sit, it’s better to have your own stock than anyone else’s,” he said.

The idea is simple – when a company opts to buy its own shares, it reduces the number of outstanding shares and increases their value, thereby increasing shareholder’s equity. This, in turn, boosts the earning per share (EPS) ratio, which is calculated by dividing the net income earned over time by the total number of outstanding shares.

As such, when a company opts to repurchase its own shares, it will boost its EPS- which translates into higher share prices and higher returns for shareholders.

What’s more – this is a highly effective way of generating passive income without additional investments or savings from investors!

Buffett expressed his opinion: “If you don’t have a practical use for your money and the stock is underpriced, I believe repurchasing it is the best course of action.”

“I think repurchasing stocks is the most intelligent way of utilising surplus funds,” he continued. “It’s far preferable to performing dividends, which are an inefficient use of money on a tax basis.”

Warren Buffett later put his own words into motion to underscore his point when Berkshire Hathaway initiated its share buybacks.

Even though the ASX is full of stocks offering generous dividend payouts, understanding Buffett’s approach to share buybacks may be an attractive opportunity for those seeking passive income.

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