Here Are 3 Things Every Successful Passive Income Investor Has in Common -- and They're Simpler Than You Might Think

Companies that generate monster returns get a lot of attention from the investment community. And it's no surprise why. There are many market participants out there that want to achieve huge gains from the stocks they own.

However, this isn't the only way to allocate capital. Some investors just want their holdings to produce a steady and dependable income stream. In order to increase the chances of adopting this approach successfully, there is some important info to keep in mind.

Here are three things every successful passive income investor has in common. They're a lot simpler than you might initially think.

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Buy and hold for the long term

This first piece of advice drastically stacks the odds in your favor. It's something that the most successful investors do. This strategy is the mentality that the legendary Warren Buffett operated with for decades when he was the CEO of Berkshire Hathaway. It's all about buying and holding for the long term.

Today's economy, market, and society are defined by an abundance of information. But investors don't have to pay attention to everything. And there's no need to act on all of this news.

The best course of action is to first identify high-quality companies. Next, plan to hold these stocks for at least five years (ideally longer). This allows compounding to work its magic. And it can result in a massive income stream.

The Omaha conglomerate provides a clear example of how lucrative this move can be. Berkshire Hathaway built up its stake in Coca-Cola in the late 1980s and early 1990s, having allocated $1.3 billion in total. As of March 31 of this year, the beverage stock made up 9.9% of the entire public equities portfolio, and it generates $848 million in annual dividends.

That passive stream of income is more than half the initial investment. That's the power of long-term discipline.

Dollar-cost average

Another commonality among successful passive income investors is dollar-cost averaging (DCA). This involves buying stocks at regular intervals, say monthly or quarterly, regardless of market or economic conditions. It's almost like automating your investment strategy.

Investors who follow this philosophy completely eliminate the need to time the market. And that's a good thing. It's not a weakness. There is plenty of research that shows those who think they can successfully trade in and out of positions cause more harm to their portfolios. A DCA strategy allows you to take advantage of numerous entry points.

Because investors are probably allocating fresh savings to the stock market on a consistent basis, this approach naturally fits with your financial schedule. Plus, it allows you to develop an invaluable habit of constantly investing.

Diversify your holdings

It's also extremely important to figure out ways to diversify your portfolio. You don't want to have all your eggs in one basket, as the saying goes.

High levels of concentration can certainly work when everything is going up and to the right. However, corrections and bear markets are normal. And they introduce volatility that's much easier to handle if you own a broad array of companies that operate in different industries and that serve different customers.

Individual businesses can also face troubles, like the threat of disruption or management blunders, which can result in weaker demand, falling revenue, and declining margins. Investors don't want to bet it all on a single stock.

An exchange-traded fund (ETF) can be extremely helpful to instantly enhance your diversification strategy. For example, the Schwab U.S. Dividend Equity ETF is a popular choice that owns 100 different stocks, all based on fundamental factors. Each position has a minimum 10-year dividend payout history.

This ETF has paid a 3.3% trailing-12-month dividend yield. It's a hassle-free way to become a more successful passive income investor.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.