So how do you identify sustainable growth? Buffett looks for businesses with durable competitive advantages—companies that competitors can't easily chip away at. If he doesn’t have a high degree of confidence that a company will be significantly larger in the future, he won’t buy—even if it looks cheap.
Aside from the popular MOAT ETF, another ETF that reflects Buffett’s philosophy is the Dividend Aristocrats. These are companies that have raised dividends for at least 25 consecutive years. To do that, the business must be growing steadily. But my issue with Dividend Aristocrats is that most of the companies grow slowly—usually in the single digits.
Consistency is good, but consistent growth in the 10–15% range over decades is even better. That’s the sweet spot.
Also, not all great growth stocks pay dividends. And companies that do pay dividends tend to grow more slowly. So a better measure is Free Cash Flow (FCF), which is closest to what Buffett calls “owner’s earnings.” A company that grows FCF consistently is far more valuable than one that just grows revenue or even profits. As the saying goes: Revenue is vanity, profit is sanity, cash flow is reality.
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