Warren Buffett and dividends (Jan 18, 2012)

Jan. 18, 2012 8:36 AM ET2 Comments
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Contributor Since 2010

Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator (so Silicon Valley is the natural habitable area for me and I love climate but hate traffic in this part of California). I invested in contrarian/value stocks from the mid-nineties (oh boy it was XX century) without serious success. Therefore, I switched to dividend growth investing /DGI/ in 2006 due to the eureka moment caused by Lowell Miller's book "The single best investment: creating wealth with dividend growth".  From that time I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. The goal was to exceed my average annual expenses with dividends before retirement, and to have inflation-proof income as a retiree. I did achieve this goal in about a dozen years. Dividends I collect from numerous companies around the globe are about 150% of my average annual expenses.

I like to read /and read a lot - did you look on my SA photo 8-)? / including popular and academic investment books and papers. After 200+ investment books and perhaps even large number of papers I concluded that many (but not all) finance academics failed to delivery a good science because they usually are more concerned about match between their models and limited (in time and place) data-sets than about underlying assumptions of their models (that are often too naive from physicist point of view). On another hand, finance practitioners such as fund managers have different goals than I (for example, they want to outperform or replicate market each single year while my goal is to have good moderate inflation-proof income from my investment and I don't worry to under-perform in a bull market) and to some extend more limited in their choices than I (for example, with micro- and nano-cap stocks). It gives a chance for me as amateur investor to compete successfully with professionals in niche strategies such as global dividend investment (see e.g. http://seekingalpha.com/instablog/725729-sds-seductive-dividend-stocks/266502-why-i-m-a-dividend-zealot-jan-31-2012 although the same ideas and facts were re-used few times in better-written SA articles).

My personal portfolio consists of more than 200 dividend growth (DG) and high yield (HY) stocks of high quality companies with good histories of dividend payments. I also oversee some family members portfolios, so totally we invest in almost 600 different dividend stocks /about 50% US and the rest from 6 continents - we are open to invest into good companies in Antarctica and any planet within 120 light years from the Earth if they pay dividends 8-)/. We all understand that

a) double taxation (that should be forbidden IMHO) theoretically works against dividend investing (but I guess market adjust stock prices for dividend payers vs. other companies);

b) DGI is mostly trust in company's Board of Directors consistency and willingness to increase dividends while HYI is mostly disagreement with market sentiment;

c) no fast money are possible from HYI and especially from DGI, although we rarely use some short-time opportunities (e.g., dividends rain during 2012 Fiscal Cliff);

but both above-mentioned styles fit my mentality and we share the same goal that I specified back in 2006 across all portfolios. 

My investor edges are

i) patience as well as independence in time frames and market exposures forbidden for many finance practitioners;

ii) critical scientific approach (used in natural science rather than in liberal sciences) to finance academics' ideas and strong selection between useful and worthless findings;

iii) proprietary forecast of dividend reductions in about a year ahead delivered from mix of finance data, engineering hardware reliability ideas, some physics concepts with behavior signals;

iv) willingness invest in dividend companies that are too small for institutional investors.

I rather put my thoughts and ideas in SA blog-posts (https://seekingalpha.com/user/725729/instablogs#instablogs)  and in comments than in articles (I'm pretty busy/lazy/English-incompetent to perfect a good smoothly-readable article) but in all cases all standard disclaimers are applied. One of good things I have learned in Intel R&D, that decision should be data driven. So I try to supply my ideas and thoughts with most relevant data. I love Russian playwright Anton Chekhov's principle "Brevity is the sister of talent" and think it is even more important nowadays with ocean of information in front of any investor. So, I try to follow this principle in my SA blog posts and comments but please remember that "If I have more time, I would have written shorter". Being a scientific journals referee I have a bad habit to find few weak points in almost any manuscript, so I probably too critical in some comments but I hope the article authors excuse me and agree that "veritas" is not only "in vino" but rather in the discussions.

I prefer communicate via SA email rather than inside comments (I usually turn off "Track new comments on this article" SA's feature). So send me a SA email if you have a question or would like to discuss my point of view.

As far as I know Berkshire Hathaway /BRK.A/ paid dividends only once when Warren Buffett (WB) left for a restroom during annual meeting. Many dividends opponents refer to WB anti-dividend policy in order to criticize dividend-oriented investing.

WB is right about tax disadvantages of dividends and he was probably right with his dividend attitude about 30 years ago. But I think he is wrong during past 20 years. Let me explain why I think WB approach to dividends should be different now.

In order to make difference in BRK.A performance WB needs to invest around $5 billion in a good company. So his investment universe is limited to big companies only. In order to make difference in Average Joe (AJ) performance probably AJ needs to park around $100 thousand in a good company. Even if AJ is not as good capital allocator as WB it is much easy for AJ to find a good investment between big and small companies than for WB.

Therefore, I think WB should be more friendly to AJ and BRK.A should pay dividends, e.g. a fixed percent (at least 10%) of earnings.

Disclosure: I do NOT own BRK.A and BRK.B because they do not pay dividends.

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