Why I Don't Invest Like Warren Buffett
Tuesday, November 6, 2012
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Why I Don't Invest Like Warren Buffett

-- By Carla Pasternak

In the most recent quarter, Warren Buffett's business collected $1.34 billion in dividends. What he does with that money may surprise you. (Full Story Below)

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Why I Don't Invest Like Warren Buffett

I have never advised my readers to invest in Warren Buffett's Berkshire Hathaway (NYSE: BRK-A).

And it's not because a single share of the class A stock costs $130,300 or because I think it is overvalued, 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 collected more than $1.34 billion from its 31 dividend paying holdings -- enough to pay $812 per share. Yet none of that money made its way back to shareholders.

Granted, Buffett's style is to try and turn that money into more money. But for me, I'd rather collect a steady stream of cash that I can do with what I please.

This is not to say buying shares of Berkshire's class A or B (NYSE: BRK-B) stocks are a terrible investment. In fact, it could be a nice addition to an income portfolio for people also looking for capital growth.

But investing in dividend paying stocks is one of the wisest choices an investor can make.

Apparently I'm not the only one that feels with this way... Other investors seem to prefer dividend stocks over non-dividend payers as well. From 1972 through 2011, U.S.-based dividend stocks in the S&P 500 returned 7.1% annually, far exceeding the 1.5% return for non-dividend payers.

This chart tells the whole story. $1,000 invested in 1972 in non dividend-paying stocks would be worth just $1,700, at the end of 2011. The same amount in dividend-paying stocks would be worth about $26,000. That's over 15 times more.

This study supports my conviction that dividends are one of the most powerful investing tools available. But, as Chief Investment Strategist behind High Yield-Investing, I am biased.

So don't just take my word for it, listen to what another investor had to say about dividend investing:

"I have made more money in retirement than I did when I was working. Income from dividend-paying stocks (which I collect every month) is even better than my greatest expectations."

- High-Yield Investing subscriber, William B.

And one look at Warren Buffett's portfolio shows that the man likes dividend paying stocks himself. Of his 38 holdings, 31 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 the market.

But not all dividend stocks are created equal. You can't just go out and buy a stock simply because it sports a high yield. Remember, there are two ways a stock's yield can go up... either the company raises its dividend, or the company's share price falls, thus the yield goes up.

When picking stocks to add to my High Yield-Investing portfolio, these are some of the of the criteria I look at when evaluating an income investment:

       1. Long track record of paying consistent and rising dividends
       2. Matching history of improving earnings
       3. Strong cash flow sufficient to pay dividends and then some
       4. High projected growth that can lead to dividend increases
       5. Zero or little debt, because debt-free companies have more cash to distribute
       6. Noncyclical business models that can profit in all markets and at all times

Very few stocks actually possess all these criteria, but if you're researching a company and it has one or more of these metrics, you may have found a winner.

Even after passing this screen, there's no guarantee a pick will put in solid returns. Any investment, short of a U.S. Treasury Bond, can lose money... no matter how sound the investment may seem.
 
But history clearly shows that investing in dividend-paying stocks is one of the best ways to invest in the stock market. 

Good Investing!


Carla Pasternak's Dividend Opportunities

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Disclosure: Neither StreetAuthority nor Carla Pasternak own shares of the securities mentioned in this article. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any "real money" model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.

 

Income Notes

As of Tuesday's close, the five highest-yielding stocks in the S&P 500 were:

1. Pitney Bowes (NYSE: PBI)
- 11.8%

2. Windstream (Nasdaq: WIN)
- 10.5%

3. RR Donnelley (NYSE: RRD)
- 10.5%

4. Frontier (Nasdaq: FTR)
- 8.6%

5. CenturyLink (NYSE: CTL)
- 7.5%

-- Research Staff


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