Warren Buffet, The Ultimate Dividend Investor

Warren Buffett is the greatest investor in America. The famous value investor topped Forbes richest individuals list in 2008, overthrowing his pal Bill Gates from Microsoft (MSFT) from his twelve year period of holding this title. Investors have long followed Buffett’s advice on stock selection, economic issues and his pure genius common sense and business acumen. In a previous post I highlighted the individual holdings in Buffett’s Berkshire Hathaway portfolio as of June 30, 2008. This was a timely post, as Buffett recently made some major headlines when he announced that he was buying American stocks. Before investors follow Buffett's advice, they should understand the nature of the stocks that are in the Berkshire's portfolio.

It seems to me that out of 38 holdings in BRK-A’s (BRK.A) portfolio 12 companies are dividend aristocrats, one is a dividend champion and three are dividend achievers. Only 5 of his holdings do not play any dividends at all. One of its holdings’ business purpose (CDCO.ob) is limited to the orderly runoff or sale of its remaining assets. Based off current dividend payments for the stocks in his portfolio, Berkshire Hathaway makes $1.65 billion in dividend income per year.

I am not at all surprised that the Oracle of Omaha has almost half of his portfolio in good quality dividend growers. Most companies that have managed to increase their dividends for long periods of time are ones that have wide moats as well as excellent competitive advantages in the marketplace. Having these qualities leads to rising earnings which tend to support a steady pace of increase in dividends.

On a cautious note however, I would do my own homework before investing in any stocks that Berkshire Hathaway owns. Some of his holdings like Bank of America (BAC) recently cut their payments by 50% which prompted a massive drop in the stock.

Comments

[sr9web:]

Typical Buffet - he want dividends for himself, but he doesn't pay any.

Anything Buffet says in the media is expected to be self-serving.-

2008 Nov 02 02:01 PM

[James Cullen:]

sr9,
Buffett has shown an ability to reinvest capital at a higher rate than people receiving the dividends could, so that isn't really self-serving, it's value maximizing (especially when you consider dividend taxation). Plus, if Berkshire authorized a huge dividend, a huge portion would go to their largest shareholder - Buffett - and you'd probably complain about that.

Compare Berkshire's behavior with that of the many companies which continue to pay dividends, and then need to raise capital at usurous interest rates later. Who has better corporate governance and financial policies?

2008 Nov 02 02:37 PM

[Football Geek:]

I assumed the opposite of Warren Buffet, that he would want to have those earning kept by the company to compound and grow. Dividends that are
paid out are taxed yearly, while cash that is kept by companies grows and
eventually you pay capital gains, but they are paid only once. So all that money you paid in taxes could have compounded inside the share price over the period that you own the shares.
Warren beleaves that compounding is the secret to the highest after tax
rate of return. Owning a company is alot more about fundamentals, then what they pay out as dividends.

2008 Nov 02 03:56 PM

[walker6713:]

Your figures don't make sense, take KO with a value of 10 million, you show dividend income of 304 million a year. Excuse me? Almost every case is like this.

2008 Nov 03 11:35 AM

[walker6713:]

OK, the first column says value, but it should say value in 1000's, then the figures are ok. His KO stock is worth ab out 10 billion today, and the annual dividend would be 304 million.

2008 Nov 03 11:50 AM

[banyan49:]

As James said, if the management can effectively reinvest the free cash (get at least one dollar for every dollar invested), then they should retain the free cash instead of giving out dividend. However, if the management cannot effectively do so, the logical choice is to give it back to the shareholder and let shareholder decide the best way to allocate these money.


On Nov 02 03:56 PM Football Geek wrote:

> I assumed the opposite of Warren Buffet, that he would want to have
> those earning kept by the company to compound and grow. Dividends
> that are
> paid out are taxed yearly, while cash that is kept by companies grows
> and
> eventually you pay capital gains, but they are paid only once. So
> all that money you paid in taxes could have compounded inside the
> share price over the period that you own the shares.
> Warren beleaves that compounding is the secret to the highest after
> tax
> rate of return. Owning a company is alot more about fundamentals,
> then what they pay out as dividends.

2008 Nov 03 12:42 PM

[Michael Zhuang:]

Despite their tax-disadvantage, high-dividend paying stocks are a great way to survive a prolong recession. As Robert Shiller discovered, stock prices fell more than 80% during the Great Depression while dividends only fell 11%-12%.

investmentscientist.co.../

2008 Nov 04 04:18 PM

[kurt walter:]

St. Warren wouldn't invest in too many companies like Berkshire because they pay no dividend? Just wondering.

2008 Nov 05 02:22 PM

[Horace Bunce:]

Warren Buffett has become a personality, which will eventually bring his downfall. Like a moth circling the flame, his wings will soon be singed away in a puff of smoke. Anyone who does not believe an individual has the right to pass all his property to whom he wished, without tax; who avoids taxes by charitable donations to organizations from which his children receive perpetual salaries, and supports a Socialist-Marxist political regime is no one we should look to as a financial sage. To George Soros goes the same. His mentor, Benjamin Graham, would be ashamed of him.

2008 Nov 06 10:51 PM