Warren Buffett hates paying dividends. He sure loves receiving them.
We can easily understand why.
Buffett’s principal investment vehicle, Berkshire Hathaway (NYSE: BRK.b), will collect at least $3.1 billion from its top-10 stock holdings this year.
All 10 stocks are dividend payers. All but one is a dividend grower.
Immediate income is the obvious attraction for Warren Buffett, as it is for many income investors. After all, who reading this isn’t drawn to investments that provide a reliable income stream?
And if that stream rises over time? All the better. That’s the case for Warren Buffett and Berkshire.
I offer another reason – one less obvious – for Buffett’s affinity for dividend-paying stocks: low price volatility.
Established dividend payers are frequently less volatile than their non-dividend-paying counterparts.
When prices start to swing wildly, many stocks that eschew paying dividends will rollick up and down like a skiff caught in the Atlantic during a nor’easter.
The right dividend stocks, on the other hand, will simply sway like an outrigger lolling atop calm South Pacific seas.
Beta is a measure of a stock’s price volatility. The market beta is defined as 1.0. Individual stocks are ranked according to how they deviate from the market beta.
A stock that experiences more volatile price swings will have a beta above 1.0.
Amazon.com (NASDAQ: AMZN) – a non-dividend payer – has a beta of 1.7. When the overall market has been up 1%, Amazon.com has been up 1.7% based on historical price movements.
It works in reverse as well.
When the overall market is down 1%, Amazon.com shares have historically been down nearly 70% more than the overall market.
McDonald’s (NYSE: MCD) and Altria Group (NYSE: MO) are two old-school dividend payers. Both have paid and grown their respective dividends annually for decades.
McDonald’s beta is 0.34, Altria’s is 0.22. Both stocks are at a minimum a third less volatile than the overall market.
You can survive a nor’easter without incurring wear and tear. Most of us, though, prefer to avoid the experience. The South Seas route is more appealing.
You can take the calmer route, as Warren Buffett has. It’s easy enough to screen for dividends and beta.
Or you can hand off the chore to someone else. Low-volatility exchange-traded funds (ETFs) will do the work for you.
Two such ETFs are worth considering if you prefer the latter option: the Invesco S&P 500 Low Volatility (SPLV) and the iShares MSCI Minimum Volatility USA ETF (USMV).
Many investors have sought shelter in both ETFs. Together they have raked in $6.4 billion of investor funds over the past year.
As you might expect, established dividend payers underpin their respective portfolios.
Invesco’s top holdings include Republic Services (NYSE: RSG), NextEra Energy (NYSE: NEE), Exelon (NYSE: EXC), and other high-yield dividend payers. iShares slants more toward dividend growers: Visa (NYSE: V), Waste Management (NYSE: WM) and the aforementioned McDonald’s are among the top-five.
Invesco and iShares pay dividends. Invesco even pays monthly. Unfortunately, neither pays much. Both ETFs yield less than 2%.
I prefer to seek calm on my own accord.
If you’re up to it, consider constructing your own portfolio of dividend stocks. You’re more likely to get what you want – high yield, dividend growth, or both – on your terms.
Just as important, you’ll get Buffett’s coveted low price volatility.
The Mailbox Millionaire Income System could be your best option.
It’s paying $1,175 every 20 days on average. Investors have realized income yields of up to 41.2%.