Unlocking Passive Income: Warren Buffett’s Sister’s Strategy for ASX Shares

Unlocking Passive Income: A Strategy for ASX Investors

Many investors own ASX dividend shares with the aim of receiving passive income. These types of stocks pay out dividends (usually twice yearly but sometimes monthly) after generating profit from their operations.

There are several different dividend strategies investors can adopt. Some may focus on high-yield stocks, others may like dividend-paying stocks from resilient industries, and some may prefer businesses that are growing their payouts at a fast rate but currently have a relatively low dividend yield.

But there’s also another compelling way to earn income from shares that doesn’t involve dividends, as recently highlighted by the sister of investing legend Warren Buffett.

Bertie Buffett has revealed a great strategy to create the income she needs from her ownership of Berkshire Hathaway shares. Her method can be used by anyone with a sizeable investment balance without needing to receive dividends from their own shares.

Berkshire Hathaway is a huge, listed US business that invests in other shares and also operates many private businesses. Warren Buffett, one of the world’s greatest-ever investors, has led Berkshire Hathaway for decades, helping it become the American powerhouse it is today.

As well as being Warren Buffett’s sister, Bertie Buffett is a long-time shareholder of Berkshire Hathaway. She’s also front and centre in Warren Buffett’s mind when he writes his annual shareholder letter.

Berkshire Hathaway famously doesn’t pay dividends, so let’s look at how Bertie is generating cash flow through her ownership of the company’s shares.

How Buffett’s sister generates passive income

Bertie Buffett recently spoke to CNBC’s Becky Quick. Bertie used to expect dividends from her investment portfolio, but changed her mind after receiving some advice from her famous brother.

Warren Buffett suggested Bertie simply sell a portion of her shares to unlock the cash flow she needs.

I’ll give you an example of how this could work. Imagine Bertie owned $100,000 of Berkshire Hathaway. If the Berkshire Hathaway share price gained 10% in a year, it would then be worth $110,000. Bertie could sell $4,000 worth of shares and achieve a 4% ‘dividend yield’ on her original $100,000.

Of course, Bertie might be unlocking $100,000 of passive income at a time rather than $4,000! What are some of the attractions of this method? Bertie explained in the CNBC interview:

…I can decide when I declare a dividend, I can declare one for myself you know in essence by selling some stock and I can choose when I’m going to do it and choose how much it is. And it’s capital gains instead of regular income tax and that’s good.

How to apply this to ASX shares

We can utilise this strategy ourselves to sell ASX growth shares and unlock passive income cash flow.

Of course, one would need a sizeable amount invested to make the capital growth and sale worthwhile.

If someone owned $1,000 worth of shares, for example, it wouldn’t make much sense to sell $50 worth (a 5% dividend yield) — that’s not a lot of passive income for the brokerage cost and effort of reporting the sale to the ATO.

In my opinion, one of the key advantages to Bertie utilising this strategy with her Berkshire Hathaway shares is the fact the US company has a diversified portfolio which steadily changes over time to ensure it’s future-focused (such as its investment in Apple).

For the most effective ‘Bertie Buffett’ strategy, I’d want to choose a well-diversified exchange-traded fund (ETF) that can deliver good capital growth and owns strong businesses with decent fundamentals.

Some of the leading ASX ETFs I’d choose for this strategy include the VanEck MSCI International Quality ETF (ASX: QUAL), Betashares Global Quality Leaders ETF (ASX: QLTY), VanEck Morningstar Wide Moat ETF (ASX: MOAT), and the BetaShares Global Sustainability Leaders ETF (ASX: ETHI).