I have never advised my readers to invest inWarren Buffett 's
Berkshire Hathaway (NYSE: BRK-A)
And it's not because a single share of the Class Astock costs
$164,690 or because I think it isovervalued , or any of the other
usual reasons for that matter.
The reason is actually quite simple.
It's because Warren Buffett has vowed time and time again to
never pay Berkshire shareholders a cent in dividends.
Consider this: In the most recent quarter, Berkshire Hathaway
more than $1.35 billion
individend and interestincome from its holdings.
Yet none of thatmoney made its way back to
Granted, Buffett's style is to try to turn that money into
more money. But for me, I'd rather collect a steady stream ofcash
that I can do with what I please.
This is not to say that buying Berkshire's Class A or
Berkshire Hathaway B shares (NYSE:
is a terribleinvestment . In fact, it could be a nice addition to
an income portfolio for people also looking forcapital
But when it comes to collecting steady and rising income
streams,investing in dividend-payingstocks is one of the wisest
choices an investor can make.
Apparently I'm not the only one who feels this way. Other
investors seem to prefer dividend stocks over non-dividend payers
as well. That's because these stocks not only provide income,
In fact, Ned Davis Research found that from 1972 through Sept.
U.S.-based dividend paying stocks in the S&P 500
returned 8.7% annually, far exceeding the 1.6% return for
As you can see, the difference between non-dividend payers and
dividend payers is stark. If you invested $10,000 in non-dividend
payers in 1972, you'd have $18,961 by September 2012. The same
amount in dividend-paying stocks would be worth $302,800.
That's almost 16 times more.
This study supports my conviction that dividends are one of
the most powerful investing tools available. But, as Chief
Investment Strategist behind
, I am biased.
But one look at Warren Buffett's portfolio shows that the man
likes dividend-paying stocks himself. Of his 40 holdings, 30 pay
dividends. Not to mention that many of those companies have a
proven track record of raising or maintaining dividends.
The simple fact is that if you're ignoring dividends, you're
missing out on one of the safest ways to make money in themarket
But not all dividend stocks are created equal. I'm not
suggesting that you just go out and buy a stock simply because it
sports a high yield -- that's a risky proposition that can leave
you with dividend cuts and losses if you choose
In addition to high yields, you should be looking for high-
incomeinvestments -- ones that pay large, rising dividends with a
degree of safety. When picking stocks to add to my
portfolio, these are some of the criteria I look at when
evaluating an income investment:
1. Long track record of paying consistent and rising
2. Matching history of improvingearnings
3. Strongcash flow sufficient to pay dividends and then
4. High projected growth that can lead to dividend
5. Zero or littledebt , because debt-free companies have more
cash to distribute
6. Noncyclical business models that canprofit in all markets
and at all times.
Very few stocks actually possess all these criteria. In fact,
our research team ends up rejecting 99 out of 100 potential
high-dividend stocks andfunds because our test eliminates
companies that may be unable to meet our standard for secure,
steady and growing dividend payouts.
Action to Take -->
Remember, there are no "absolute" guarantees. No matter how
sound an investment may seem, anything short of a U.S.Treasury
bond can lose money. But in my experience, if you're researching
a company and it fits most or all of these metrics, you may have
found a winner.
And as I mentioned earlier, history clearly shows that
investing in dividend-paying stocks is one of the best ways to
beat the market and collect a healthy stream of income at the
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