Investing in stocks is not the easiest of tasks, and it is not exactly free of pitfalls and rollercoaster rides. So how do we smooth out some of the bumps? We learn from the best… and if raw numbers are anything to go by, Warren Buffett (who needs little introduction) and his long-time partner and Vice Chairman Charlie Munger of Berkshire Hathaway (BRK.A), (BRK.B) are certainly up there as some of the very best investors in stocks.
If you are serious about investing in stocks, then "informed" knowledge is power, and to get that informed knowledge requires some effort on your part. The purpose of investing in shares is to make your money grow and making your money grow requires work. The good thing about this work is it's fun if approached wisely!
My first recommendation would be to read the annual letter from Buffett and Munger to Berkshire Hathaway shareholders; it is always a fabulous and insightful read. Here is a link to the last 35 years of letters. Read as many as you can, and then come back here and enlighten us in the comments.
Many people, including me, consider Charlie Munger to be an even more interesting thinker and writer than Warren Buffett. I would recommend that you read his letters to WESCO Financial shareholders, and a book that a group of Charlie's friends assembled, which is a compilation of his most interesting thoughts and speeches called Poor Charlie's Almanack, inspired by Ben Franklin's Poor Richard's Almanack. This is one of the best books you can buy about investing with a wealth of real-world examples from Charlie's experience as a Berkshire Hathaway partner and as Chairman of WESCO Financial.
Poor Charlie's Almanack has the added benefit of including his "Investing Principles Checklist," and speech, The Psychology of Human Misjudgment, which is an exposition of 25 key forms of human behavior that lead to misjudgment and error (very useful for life, not just stock investing).
Finally, read the book that Munger often gave away at conferences where he was speaking: Influence. The Psychology of Persuasion by Robert B Cialdini. Munger said at one speech where he gave the book away to all in attendance: "if you have half as much sense as I think you do, you will immediately order copies for all of your children and several of your friends. You will never make a better investment."
Research Some More
Now, dig further into the investments they make and learn to think why they make the investment decisions they do. It's all there in black ink throughout the above letters to shareholders and books.
You may already know that when they decide to invest, they invest for the long run. They are not day traders looking for a quick financial killing -- they believe that is a fool's game.
What you will discover, if you do your homework, is that one of the fundamental choices they make when investing is, "what are the dividends?"
In his 2010 shareholder letter, Buffett highlighted their success with Coca-Cola's (KO) dividend that paid BH $88 million in 1995, but is now providing close to $400 million each year! Another example comes from an overseas investment. Berkshire Hathaway rarely ventures overseas, but has acquired some stakes in Chinese and UK entities over the last few years. Its investment of approximately $1.5 billion in UK grocery chain Tesco, whose motto is "Every Little Helps," will provide them with a dividend of about $100 million this year.
Think about that… nearly a 7% return on investment in dividends alone!
A good example of the annual dividend percentage Berkshire Hathaway receives is shown in this article by Dividend Investor. These dividend payments are cash flow over and above any increase (hopefully not decrease) in the share value. So do your research -- dividends matter more than the average investor or day trader realizes.
Buffett himself earned an estimated $42,583,971 in income in 2010 from the dividends from his own personal share holdings in companies (excluding Berkshire Hathaway).
One final piece of advice from Warren Buffett: "Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market."
Will you take the plunge and do the work, or do you know a better way to reap dividends?