The majority of dividend investors tend to neglect value investing. They say it does not fit their portfolio or strategy. I beg to differ. Used in a reasonable way, it fits their strategy perfectly.
For a dividend investor, a company like Berkshire Hathaway is totally out of the picture since it does not pay any dividends at all.
That’s unfortunate because Buffet’s company is everything a dividend investor looks for:
- Magnificent leadership
- Diversified product line (insurance, finance, railroad, retailing, utilities, manufacturing, energy…)
- Giant by every measure (also conglomerate)
- Great return on assets
- Great compounded return, 19.2% since 1966
- In many ways a boring company
Are you really sure that you want to neglect a company that makes up 58% of Bill Gates’s portfolio? If the richest man in the world is willing to put that amount in one stock, you should at least give it a thought, right?
Buffet is not willing to pay a dividend because he thinks Berkshire Hathaway would be better of if they invested the money themselves.
Keep in mind that dividend is nothing magical. It’s the money that’s left after the variable costs and the fixed costs are subtracted from the total income. That’s all. The company has two options regarding how they want to handle this rest/money:
1. Directly invest the money straight into the business, and therefore increasing the possibility for an even greater return next year and so on. This is called retained earnings, and retained earnings is what increases growth.
2. They can choose to pay this amount to the shareholders. The issue here is that when this amount gets paid a dividend, it´s also taxed, so the amount is reduced. Even if the investors put the dividend into the company again, (by buying the same stock), the total amount is less than what the company could have put to work themselves. That means money value is lost in this transfer. Another aspect is that you might get greedy, and choose not to reinvest the dividend, which really is a great danger here.
This is basically why Buffet does not like dividends, and why he chooses to rather increase the value of his company himself. He thinks that the stockholders would be better of just holding on to the stock, and let the management increase the value.
The Dividend Investor
For a Dividend Investor, this might seem logical, but still not tempting. You are not getting any cash in hand, so when there is a crash or stocks get cheaper, you will not be able to use the dividend to buy stocks at a cheaper price. Yeah, that sucks! We don’t want that to happen.
I get that, but here is the thing:
Let the majority of the portfolio be dividend stocks. They will make sure you have a stable money machine that pays at all times, but spice up the portfolio by including some quality value stocks like Berkshire Hathaway, and if you want some extra cash, just sell 3% of your holding. That way you make sure you get money at all times, you expand your investment horizon greatly and you get companies that want to grow further. Pretty nice, right?
Please feel free to comment. It makes it easier for me so that I know if what I´m writing is gibberish or actually has some value for someone.