Forget dropshipping! I’d rather follow Warren Buffett and build effortless passive income

I’ve done a quick search online for passive income ideas and some eclectic suggestions popped up. One of them is to start a vending machine business. I can see the appeal here, since the cost of starting such a company mainly consists of buying machinery and supplying it. Then I just collect the money from the transaction.

Obviously there is also maintenance work, restocking, and some research to find the main location. But I can see the attraction. Of course, stock picking legend Warren Buffett did the same thing as a teenager, investing $25 to buy a pinball machine in 1946.

A more popular passive income idea is dropshipping. This usually involves reselling goods without having to keep stock or fulfill customer orders directly. Again, sounds good, in theory.

Dropshipping income doesn’t look passive

Due to the very low barriers to entry in the dropshipping space, competition is very high. That means hundreds or even thousands of businesses may be offering the same product as mine. That means I have to pay for and optimize advertising to find an audience for the products I sell.

In addition, I need to develop customer relationships and encourage future orders. And for whatever reason, it’s almost impossible for some customers to want to return a product. That can make coordination with real suppliers a headache.

This all sounds like a lot of work to me, which I don’t think is what most people want when they look at dropshipping.

Indeed, passive income is classified as “unearned income” by the Internal Revenue Service in the US. But making money from a dropshipping business that I had built after a lot of hard work and thought was impossible. Looks like my fruits (probably a lot).

However, when I receive regular dividends from kaya McDonald’s and Legal & General, it is unearned. That is passive income. Unless something causes the business to reduce or cancel payments (which is always a risk with dividend stocks), the money is just semi-regular in my trading account.

I can use this passive income to help fund my lifestyle. Or, more often, I reinvest those dividends and buy more shares. These additional shares can continue to generate more income. And so on, like a snowball, until the return begins to compound.

Warren Buffett: the age of compounding

The ‘Oracle of Omaha’ often says that their wealth can be attributed to their combined generating power. He bought his first stock on March 11, 1942, when he was 11 years old. But the amazing fact is that he has made more than 90% of his wealth (estimated to be more than $100bn) since he was 65 years old.

Its parent company, Berkshire Hathawayregularly receive increasing dividends from investments made literally decades ago.

Now, it is unwise to just buy random stocks and expect passive income. A business must have a valuable product or service, strong earnings, and a strong competitive position. And not too overvalued.

So there is some investigative work ahead. But if I’ve invested in quality companies with these characteristics, any income I’m paid is passive.