Warren Buffett – Berkshire Hathaway CEO and chairman, plus the world’s greatest investor – doesn’t really like dividends. I know that may seem surprising to you, but it’s the truth. It’s 100% true.
Specifically, the top dog of the investing world does not have a problem receiving dividends. But as you may or may not know, Berkshire Hathaway has never actually paid out a dividend. Here’s the real kicker… It’s never going to pay a dividend either. At least while Charlie Munger and Warren Buffett run the show.
While rereading the latest annual letter to shareholders written by Warren Buffett, it’s a reminder of Warren Buffett’s investing prowess and his insights as an intelligent investor.
At this point, most people know that Berkshire doesn’t pay dividend. Many older investors, and those who are retired, will overlook the stock because they are living on a fixed income.
In the most recent shareholder letter, Buffett talks about pressure from investors who are looking for the company to begin paying a dividend. It’s no question that Berkshire Hathaway is a major cash cow. Over the last year, Buffett and company generated $12.5 billion. In truth, a little more than $1 billion in positive cash flow is coming into Omaha each and every month. There’s lots of cash available to pay out to shareholders, but only if management thinks it’s the wisest decision. Unfortunately for investors looking for a dividend, Munger and Buffett do not agree.
That’s not to say that Berkshire Hathaway doesn’t invest by receiving dividends. Some of their best dividend payers are Wells Fargo, Conoco Phillips and Coca-Cola.
As far as the Berkshire Hathaway balance sheet is concerned, Munger and Buffett feel it’s wise to hold onto the extra cash so they can make more investments, purchase more acquisitions and buy more individual stocks. Their reasoning is simple: they have an excellent track record.
The dynamic duo of the investing world has the best long-running track record for investments in history. When investing in Berkshire Hathaway, you’re investing in a group that truly knows how to allocate its capital.
As an investor in the company, you understand that management is going to make solid, long-term investment decisions. If you do not feel this to be the case, then you should sell the stock. There’s no point hanging onto it if you do not believe in the management.
It only makes sense that pulling money out of the company to pay a dividend is a mistake. The company would miss out on some incredible future profits by diminishing its cash flow. But Berkshire Hathaway has no plans to pay a dividend, so Buffett has a different strategy for income investors. His new strategy is called the “sell off strategy.” He is personally using this method to fund his philanthropic endeavors.
Buffett’s advice is quite simple. If you are looking to earn an income from Berkshire Hathaway, just sell off a small portion of your stock holdings during the year. This will give you the ability to put money in your account as needed.
There are a number of benefits to this strategy.
First, if you do not want a dividend check as an investor, you will not receive one.
Second, Buffett believes that there is a tax disadvantage to dividends. Why? 100% of the received dividends are taxed. If you sell your stock as an investor, you only have to pay capital gains tax.
Third, investors that do not need a cash flow will continue to allow Berkshire do reinvest the profits. Just look at their historical record. The investments that they make will be sound. The stock values will continue to rise.
Buffett ends his discussion about dividends by 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.”
There’s no doubt that Warren Buffett built Berkshire Hathaway into a unique entity. The company is agile and lean, yet it owns some of the best businesses outright, both small and big. The investment portfolio is unique and diverse. More importantly than ever, the company is committed to its shareholders. This commitment will last for a very long time. Beyond the time that Buffett is in control. This is one stock that all investors should own, regardless of the fact that Berkshire Hathaway doesn’t pay a dividend.