£20,000 in savings? Here’s how I’d like to turn this into passive income of £994 per month.

Turning £20,000 into £11,938 a year – or £994 a month – into passive income may seem ambitious. And while it’s not easy, it’s absolutely possible in the stock market.

Owning shares in companies that distribute their profits as dividends can be a great way to earn extra money. And one of the best demonstrations of this comes from Warren Buffett.

Warren Buffett and Coca-Cola

In 1994, the great man’s investment machine Berkshire Hathawayowned 400 million shares in Coca-Cola (NYSE:KO) with a market value of $1.3 billion. This investment generated dividends of $776 million (before taxes) in 2024.

This is almost 60% of the money Buffett originally invested. In other words, that’s the equivalent of earning £11,938 on a £20,000 investment – and the annual payout continues to rise.

What’s most impressive, in my opinion, is that Berkshire did not use the money it received to buy more shares of Coca-Cola. Dividends grew on their own.

Buffett is a savvy investor, but this particular example is only part of that. It’s also about the value of waiting, being patient, and holding stocks for the long term.

Finding suitable promotions

Buffett’s success was a result of Coca-Cola being able to increase its dividend every year. But investors should note that growth has slowed over the past 10 years.

Coca-Cola dividends per share, 2004–2024

Created in TradingView

Since 2014, the company’s dividend growth has typically ranged from 2% to 6%. But between 2004 and 2014 they were in the range of 7–11%.

This has implications for anyone starting a job today. And while I think many investors are underestimating Coca-Cola’s prospects, I suspect a return to 10% dividend growth is unlikely.

As a result, I’d look elsewhere for stocks that can grow their dividends over the next 30 years. And the most obvious candidate for me is a party member FTS 100.

Diageo

Diageo(LSE:DGE) is currently facing many challenges. These include weak macroeconomic conditions in some markets and the possibility of US trade tariffs.

As a result, the stock is trading at an unusually high dividend yield. For the first time since around 2015, investors buying the stock today are starting with a 3.3% yield.

Diageo dividend yield 2014–2024

Created in TradingView

Then it’s about growth: To match Buffett’s result, Diageo’s dividend would need to grow 10% per year for 30 years. This is a significant challenge, but the company is in a strong competitive position.

Consumer tastes may change, but Diageo’s scale means it can make acquisitions to stay on trend. This has been the key to success so far, and I think it will be a long-term advantage.

Dividend growth

As Buffett says, the best companies are those that can grow their earnings (and dividends) without having to increase cash. A great example is Coca-Cola.

I think Diageo has a similar business. And since the stock is unusually cheap, I’ll be looking to increase my stake in November.