Warren Buffett Sure Knows How To Plant A Tree

Jun.10.12 | About: Berkshire Hathaway (BRK.B)

Every now and then, I hear from a reader lamenting the patience that is necessary for a dividend growth investor to get rich, financial independent, or whatever the goal may be. Critical of such an approach, these types of readers tend to say things like, "Yeah, well, what if I'm dead in fifteen years?" My usual response is this: Yeah, well, you could be alive in fifteen years, too. Almost any good thing that has happened to me in life has been due to something intelligent I had done previously to put myself in that position. The opposite of that is true as well: A lot of the bad things that come my way can be traced to something stupid I have done in the past that put me in the situation. And when I look at the decisions that Warren Buffett makes with Berkshire Hathaway (NYSE:BRK.B), I can't help but think, "Man, that guy knows how to grow a tree." It's amazing to look at the decisions that Buffett has made in the past couple of years that will add very significant income to Berkshire's bottom-line ten years from now. And today, I wanted to point out three moves that Berkshire (NYSE:BRK.A) shareholders will most likely be very thankful for ten years from now:

1. Wells Fargo (NYSE:WFC)-As of the last annual report, Berkshire Hathaway owns 400,000,000 shares of the California lending giant. And Buffett is very bullish on the future dividend growth of the firm, writing:

"In addition, dividends on our current common stock holdings will almost certainly increase. The largest gain is likely to come at Wells Fargo. The Federal Reserve, our friend in respect to Goldman Sachs (NYSE:GS), has frozen dividend levels at major banks, whether strong or weak, during the last two years. Wells Fargo, though consistently prospering throughout the worst of the recession and currently enjoying enormous financial strength and earning power, has therefore been forced to maintain an artificially low payout. (We don't fault the Fed: For various reasons, an across-the-board freeze made sense during the crisis and its immediate aftermath.) At some point, probably soon, the Fed's restrictions will cease. Wells Fargo can then reinstate the rational dividend policy that its owners deserve. At that time, we would expect our annual dividends from just this one security to increase by several hundreds of millions of dollars annually."

These are the types of hidden tigers that you can find in the Berkshire portfolio. You might peruse Buffett's holdings, see the 2.82% current yield of Wells Fargo shares, and shrug, "Eh." But after the firm grows its dividend by an average of 10% or so for a decade, it will become quite apparent how shrewd of an income-producing investment Wells Fargo turned out to be.

2. IBM (NYSE:IBM) -Buffett's venture into tech caught a lot of people by surprise in the past year as Buffett's $10 billion bet on IBM revealed a confidence in the moat of a technology firm that we had never seen from him. And while a lot of people might look at IBM's puny 1.75% yield and strong share repurchases and think, "Oh, that's a stock buyback kind of company", we shouldn't forget: it's a substantial dividend grower as well. IBM has increased dividends by 17.5% annually over the past ten years. If you look at IBM's starting dividend in 2000, the firm went on to double it by 2006, and then doubled it again in 2009. It's not unreasonable to expect IBM to continue dividend growth in the ballpark of 10% annually over the coming decade. Very few people think of IBM as an income producing stock, but it wouldn't surprise me if several investors have to do a double take after looking at how much income IBM generates for Berkshire in 2022 compared to 2012.

3. Bank of America (NYSE:BAC) -Those warrants to buy 700,000,000 shares of Bank of America at a $7.14 strike price anytime in the next nine years could be quite lucrative not only from a capital gains perspective, but from an income producing one as well. If Bank of America can get its dividend up to $0.36 per quarter ($1.44 per year) in the next nine years, that will give Berkshire Hathaway about $1 billion annual dividend income from Bank of America. That's not bad at all considering that the 700,000,000 warrants were gravy on Buffett's deal to lend $5 billion to Bank of America at 6% annually. I'm not sure what Bank of America's dividend policy will look like in ten years, but Buffett's BAC warrants have so much potential to generate a great amount of future income for Berkshire shareholders.

As someone interested in dividend growth investing, I find it amazing to see how adept Buffett is at finding outstanding opportunities that will generate gobs of future income five to ten years down the road. That's why the dividend investors at Seeking Alpha generally refer to themselves as dividend growth investors. It's not only about the present income now. It's about that long-term dividend growth above inflation that compounds with time. The first thing I think when I hear about any Buffett moves is this: What kind of income will this investment be generating ten years from now? And when I look at the Buffett investments in Wells Fargo, IBM, and Bank of America, I think, "Wow, this man knows how to plant seeds." But what separates Buffett from the rest of us is that he has the patience to watch them grow into trees.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.