The world's greatest investor of all time -
Berkshire Hathaway (NYSE: BRK-B)
chairman Warren Buffett - has a real distaste for dividends.
It may surprise you to hear that. But it's 100%
Now, the Oracle of Omaha doesn't mind
dividends. But Berkshire Hathaway has never
a dividend. And it won't ever pay one, at least while
Buffett and partner Charlie Munger are running the show.
I was re-reading Buffett's latest annual letter to
shareholders during my recent vacation at the Oregon coast.
I've been a Berkshire Hathaway shareholder for several years, and
have the utmost respect for Buffett's value investing
As you also know, I'm also a devoted income investor. It gives
me great pleasure to receive sizable and growing dividend checks
from my stocks (and to reinvest those dividends to buy more
shares every quarter).
Everyone knows that Berkshire Hathaway doesn't pay a dividend.
For this reason, many older investors and retirees who are living
on a fixed income mistakenly overlook the stock.
In his latest letter, Buffett responds to pressure from
investors who want the company to initiate a dividend.
After all, the diversified holding company is a true cash
In the last year, Buffett's company generated cash flow of
$12.5 billion. That means more than $1 billion in positive cash
is flowing into Omaha every month. There is plenty of cash
to be paid to shareholders, if management thought that was the
But Buffett and Munger feel otherwise.
Of course, Berkshire benefits by
dividends from its sizable investments in public companies and
dividend payers including Coca-Cola (
), ConocoPhillips (
) and Wells Fargo (
But when it comes to Berkshire's balance sheet, the duo
instead prefers to keep the cash and make additional investments,
including outright acquisitions and individual stocks. The reason
is simple: track record.
Buffett and Munger have the best long-running investment track
record. With Berkshire, you're essentially investing with the
best allocators of capital.
As a Berkshire shareholder, I know that the managers will make
good investment decisions for the long-term. If I felt
otherwise, I would simply sell the stock.
Therefore, taking money off the table by way of a cash
dividend would be a mistake. If the company started paying a
dividend, I would be missing out on the future profits.
Since Berkshire has no plans to pay a dividend, Buffett offers
up a different strategy for income investors. He calls it the
"sell off strategy." And he's personally using this to fund his
Buffett's advice is this. If you want income from Berkshire,
simply sell a small portion of your stock holdings every year. By
doing so, you can put cash in your account when you need it.
There are several specific benefits.
First, investors who don't want a dividend check and don't
need the cash won't receive one.
Second, Buffett argues that there's a tax disadvantage to
dividends. That's because 100% of dividends received are taxed.
Meanwhile, if an investor sells stock at a profit, only the
capital gain is taxed.
And third, for investors not needing the cash flow, Berkshire
will keep reinvesting the profits. If the historical record is a
sign of things to come, those investments will be sound and the
value of the stock will continue rising.
Buffett concludes his discussion of dividends, writing:
"Most companies pay consistent dividends, generally trying
to increase them annually and cutting them very reluctantly.
Our "Big Four" portfolio companies follow this sensible and
understandable approach and, in certain cases, also repurchase
shares quite aggressively.
We applaud their actions and hope they continue on their
present paths. We like increased dividends, and we love
repurchases at appropriate prices.
At Berkshire, however, we have consistently followed a
different approach...We will stick with this policy as long as
we believe our assumptions about the book-value buildup and the
market-price premium seem reasonable. If the prospects for
either factor change materially for the worse, we will
reexamine our actions."
At the end of the day, Buffett has built Berkshire into
something truly unique. It's a lean and agile company that
owns outright hundreds of the best businesses, big and small.
Plus it has a unique and diverse investment portfolio of
individual stocks and bonds.
Perhaps most importantly, Berkshire is committed to its
shareholders. That commitment and shareholder centric
culture will last well beyond Buffett. Even though Berkshire
doesn't pay a dividend, this is one stock that every income
investor should own.
My colleague - Tyler Laundon - has just updated his research
on a "mini-Berkshire." This publicly traded private equity firm
owns a small collection of outstanding American businesses. And
it even pays its investors a generous 8.3% dividend. You
learn all the details by clicking here.