Should Income Investors Own Berkshire Hathaway?

Berkshire-Hathaway-incomeBerkshire Hathaway (NYSE: BRK-B) is a must-own stock for long-term investors.

Most of the world’s best investors operate in the largely unregulated and off-limits world of hedge funds and private equity. Guys like Ray Dalio and Bill Ackman are simply inaccessible to 99.99% of investors – including you and me.

But everyone still has the opportunity to invest with the one and only Warren Buffett. His 50-year track record with 21.6% average annual gains is the envy of every investor. And the best news is that you can start investing with as little as $129 (the cost of one Berkshire Class B share).

But income investors don’t typically own Berkshire Hathaway stock. In fact, a survey of my Income & Prosperity readers indicates that the stock isn’t widely held.

The reason is simple: Berkshire Hathaway doesn’t pay a dividend. It never has paid a dividend. And it probably never will, even after Warren Buffett is long gone.

Rather than paying dividends to shareholders, Buffett and partner Charlie Munger instead prefer to invest the company’s considerable cash flow. They buy individual stocks, and acquire entire companies like Precision Castparts (NYSE: PCP).

They have an outstanding track record of delivering value to shareholders. With average annual returns of 21.6%, Berkshire beats the S&P 500 by 2-to-1.

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Buffett doesn’t want to pay a dividend for three reasons. First, only some Berkshire shareholders want to receive a dividend payment. Second, dividends are taxed at a higher rate than long-term capital gains. And third, paying a dividend would limit Berkshire’s ability to invest in stocks or make acquisitions.

In the 2012 Berkshire Hathaway shareholder letter, Buffett addressed demands for a dividend. He wrote:

“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.”

Instead, Buffett has a simple recommendation for income investors. He recommends what he calls a “sell-off strategy.”

How does this work? Investors can simply decide how much income they need from their ownership of Berkshire Hathaway shares. And every quarter or once a year, they can sell off the appropriate number of shares to generate the required income.

How to Collect a 3% Yield From Berkshire Hathaway

I went ahead and crunched the numbers over the 10-year period between 2005 and 2014. My goal was to see exactly how well this strategy would have worked.

Let’s pretend that I started on the first trading day of 2005, and made an investment of $5,000 in Berkshire Hathaway B-shares.

On the first trading day of each year, I sold $150 of my stock. And by doing so, I generated a 3% yield from my investment (which is more than 50% higher than the yield on the S&P 500). During the 10-year period, I’ve collected $1,500 in cash by selling my stock.

During this same time, the value of Berkshire stock outperformed the market. That’s even after accounting for the reduction in the number of shares owned. For example, I started in 2005 with 83 shares. By January 2015, I had 65 shares.

But the value of the investment had increased dramatically. In fact, the $5,000 investment had grown by 91%. That’s ahead of the 73% increase for the S&P 500 over the same period of time.

The bottom line is that Buffett’s sell-off strategy would have delivered solid results.

Over the 10-year period, I could have collected 50% more dividends than if I’d simply bought the S&P 500. Plus, my equity position would have beaten the S&P by nearly 2% per year.

And this analysis doesn’t even factor in the tax benefits of receiving cash as long-term capital gains, instead of ordinary income.

These superior results are a product of Warren Buffett’s investment skills. Much has been written about Buffett over the years. But the biggest secret of his investment success is often overlooked.

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Published by Wyatt Investment Research at