Financial Planning Markets & Equities

Warren Buffett’s strong preference for dividends

It doesn’t matter if you are an investment specialist, or if you have no interest in investments whatsoever, when the name Warren Buffett is mentioned, everyone knows who he is and most are aware of the successes that he has managed to achieve for investors worldwide through his company, Berkshire Hathaway. Let’s put our local stock market into perspective: few investments have been able to deliver better returns to South African investors over the last 20 years, boasting with a growth rate (in Rand-terms) of inflation plus 7% per year.

If you convert the FTSE/JSE All Share Index to US$ and you had invested $100 exactly 20 years ago (August 1996) in this index, your investment would be worth $548 after all dividends have been deducted. If, however, you had invested the same $100 in Warren Buffett’s Berkshire Hathaway over the same period, your capital would be worth a whopping $7785.

Berkshire Hathaway 20yr return vs. FTSE/JSE Allshare Index in US$ terms
Berkshire Hathaway 20yr return vs. FTSE/JSE Allshare Index in US$ terms

I’m sure many would like to say that it was pure luck that helped him to achieve great returns over a short period of time, but with a period stretching from the 1960’s, his success can be attributed to nothing less than expertise, accurate calculations and pure precision.

Personally, I think his success can be attributed to his processes and, let’s call them rules, that have changed very little over the years. These very rules are used to this day in the form of well-known sayings, such as:

*“Risk comes from not knowing what you are doing.”

*“Price is what you pay. Value is what you get.”

*“In the business world, the rear-view mirror is always clearer than the windshield.”

*“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

*“Our favourite holding period is forever.”

Warren Buffett also holds a strong preference for higher dividend yielding shares, and more specifically, companies that have managed to grow their dividends consistently on a year on year basis over the long term.

This may sound as easy as the rest of his quotes, but in practice, it proves much harder to identify these companies. It won’t help much if you manage to identify what you consider to be a high dividend yielding share, only to be knocked down by an announcement stating that the company will be lowering dividends shortly after you’ve acquired the share. It takes great expertise, exceptional processes and years of experience to identify such high quality, high dividend yielding companies.

But before you rush off to buy Berkshire Hathaway shares, I would like to provide you with a possible tool to add to your current investment strategy. In the past, I have mentioned large unit trusts’ responsibility to share information regarding their current shareholdings, and Warren Buffett is no exception – he too has to disclose the shares in which Berkshire Hathaway is invested.  You may not have analysed them yourself, but you know that if selected by Warren Buffett, these shares comply with his strict rules and regulations, and more importantly, that they are considered high yielding dividend shares which comply with the highest of standards worldwide. I know that no one knows what tomorrow may bring, but I do believe that you have a greater chance of outperforming world markets with the approval of Warren Buffet on your side.

When we take a look at his current portfolio of listed shares, five of these shares stand out for me personally. Their 12-month historical dividend yields are as follows:

*Apple Inc. – 2.01%

*The Coca Cola Co. – 3.31%

*The Kraft Heinz Co. – 2.76%

*Sanofi – 4.17%

*Wells Fargo – 3.26%

If these five companies formed part of your portfolio, you would have earned an average of 3.1% in dividends over the past 12 months, which doesn’t look too bad when compared to USA 10-year bond yield of 1.7% (even at the current inflated market levels). Even if you compare this figure to an emerging market/country such as the FTSE/JSE All Share Index’s 12-month historical dividend yield of 2.8%, it serves as proof that Buffett hasn’t strayed from his personal rules and strict processes.

In short, when prices worldwide become more and more volatile, it’s a company’s ability to generate a stable income that may be the deciding factor.

The opinions expressed in this blog are the opinions of the writer and not necessarily the opinions of PSG. These opinions do not constitute advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for any actions taken on the information contained in this blog.

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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