When it comes to dividends, Warren Buffett has delivered a decades-long master class. His holding company, Berkshire Hathawayholds critical positions in world-class companies such as Apple, Coca colaAND Bank of AmericaEach of them regularly pays dividends to Berkshire.

Coca-Cola alone currently pays Buffett’s company almost $800 million per year in dividends. The Oracle of Omaha hasn’t lifted a finger to reduce that position since it began building it in the 1980s.

Now that number is far beyond what a modest individual investor like me could ever hope to achieve. But I can still apply some elements of Buffett’s investment methodology to build significant passive income.

Think long term

Buffett’s philosophy is based on a long-term focus. We can see this in the Coca-Cola position he held for decades. His ideal holding period is “forever“.

One of my favorite Buffett quotes is:Someone is sitting in the shade today because someone planted a tree a long time ago..” A tree doesn’t appear overnight, and wealth doesn’t appear overnight for most of us either.

But if I invest £500 a month and average a 10% return, I’ll end up with £1m in under 30 years. That’s assuming I reinvest dividends to really drive compounding and actually generate a 10% return.

Neither is guaranteed—the dividends or this return—but I think it’s a realistic goal. Buffett’s long-term average is almost twice that!

Focus on truly profitable businesses

A quick look at Buffett’s portfolio reveals that almost all of the companies are making massive profits. This is obviously key for passive income, since I can’t rely on faint companies for reliable dividends.

One of the stocks in my portfolio that offers a truly huge dividend yield is British American Tobacco (LSE: BATS). It currently stands at 8.6%.

Yesterday (July 25), the company said its half-year revenue fell 8.2% to £12.3bn, hit by the sale of its businesses in Russia and Belarus last year and currency headwinds. Profit fell 28% to £4.26bn due to depreciation costs related to its US brands.

At first glance, none of this sounds great. And the growth in the New Categories section, which includes smoke-free products like Vuse vaporizers and Speed nicotine pouches, is made more tough by the rise in illegal disposable vaporizers. So that’s a constant risk.

Despite this, the company remains a high-margin, high-cash business, with leading cigarette brands such as Dunhill AND Fluke. And smoke-free brands now account for 17.9% of group revenue, up from 16.5% in the first half of 2023.

From my perspective, the high dividend yield seems sustainable and that is why I own these shares.

Taking a position

Now I should point out that while Buffett admires the economics of the tobacco industry, he does not invest in tobacco stocks. He does invest in oil stocks, Chevron AND Occidental Petroleum being Berkshire’s two largest holdings.

Some investors will not invest in either tobacco or oil for ethical reasons. And that is fine, because each investor will ultimately set their own boundaries.

Whatever those standards are, I think focusing on highly profitable companies with proven business models will create a solid foundation for growing income and wealth. Time and consistency are the other things I need.