The Motley Fool

The Lazy Warren Buffett Model for Passive Income

close-up photo of investor Warren Buffett
Image source: The Motley Fool

Warren Buffett once said that there was no premium for complexity. In other words, you don’t need a complicated, stressful strategy to make money. Often, the easiest option is the best way to create wealth or passive income. 

With that in mind, here’s an easy, lazy way to replicate Warren Buffet’s investment strategy. 

Passive-income stock

Holding companies invest in other companies to extract a steady return on their investment. While Buffett’s holding company buys entire companies or common equity, some holding companies buy preferred stock, which has a fixed-return element.

Alaris Equity Partners (TSX:AD) is an excellent example. Alaris targets family-owned or founder-controlled small- and mid-sized businesses across North America. It offers them capital to expand the business without relinquishing control. Alaris targets 13-15% annual returns on these investments. 

The stock has been on a tremendous run recently. It’s up 117% since March of last year. While the stock is flat, year to date, it is turning out to be an ideal play for investors eyeing passive income.

Core business

Alaris is a smart play for investors looking to gain exposure in the asset management business. The company specializes in buyouts, growth capital, and mature investments. As lower middle market companies come to it to recapitalize their equity, the company is able to participate in non-controlled preferred equity investment.

The investments have allowed the company to reap financial benefits and solid free cash flows that has allowed it to sustain its massive dividend. 

Dividend play

The stock’s dividend yield of more than 6% makes it an ideal play for anyone seeking to replicate the Warren Buffett strategy. The company rewards investors quarterly, making it a perfect play for generating passive income on the side.

Alaris is an established name when it comes to dividends backed by predictable revenue streams from partners. The company has been able to increase its cash flow per share both organically and by main investments.

While the stock is flat for the year, its predictable and stable dividend should excite any investor looking to generate long-term passive income. It’s also relatively undervalued, trading at a price-to-sales multiple of five and a price-to-book multiple of one.

Bottom line

Warren Buffett’s immense wealth was built on acquiring fantastic businesses with immense cash flows. However, his company is now so big that it needs to consume entire businesses to move the needle. 

Alaris Equity Partners buys a minority stake and leaves control with the founding team. Their penchant for preferred stock guarantees recurring and stable cash flows from their investments. That’s why the stock has performed so well over the past year. 

The company’s strong cash flows and 6% dividend yield make it the perfect stock for investors looking to deploy a “lazy Buffett” strategy. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Alaris Equity Partners Income Trust. Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.

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