Warren Buffett’s Secret to Thriving in a Volatile Market

Warren Buffett ceaselessly thrives. He thrives, as he and other veteran Berkshire Hathaway (NYSE: BRK.b) investors can attest, come hell or high water.
Berkshire Hathaway’s share price performance covering the past 50 years offers definitive proof.  Berkshire’s share price has grown 68-fold over the past 30 years.
As for the market today, stocks, in aggregate, remain close to the high-water mark by historical standards. Trading, though, has been more hellish in recent months. The S&P 500 has lost nearly 9% of its value since mid-September.
While the S&P 500 has lost value post-Labor Day, Berkshire has mostly held its value. Berkshire shares trade today where they traded in mid-September.
The secret to Buffett’s unrelenting success is readily decipherable: Don’t lose money. To ensure you don’t lose money, buy only investments with the highest probability of recapturing spats of lost value.
Dividend-paying stocks – dividend-growth stocks in particular – offer the highest probability. Buffett has exploited the probabilities better than anyone.
The top 10 holdings in Berkshire Hathaway’s (NYSE: BRK.b) stock portfolio account for 80% of the portfolio value. All are dividend-growth stocks.
The top five holdings – Apple (NASDAQ: AAPL), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Coca-Cola (NYSE: KO), and Kraft Heinz (NASDAQ: KHC) – account for 65% of Berkshire’s portfolio value. These investments alone generate $3.8 billion of dividends annually for Berkshire.
Because the dividend grows annually, the aggregate amount of cash grows annually. Berkshire’s share price also grows (if not always annually).
Ned Davis Research data support the favorable probabilities. The data show that dividend-growth stocks (and dividend initiators) offer the highest returns.
Dividend-growth stocks produced a 10.1% average annual return from 1972 through 2018. The return was higher than with all dividend payers (9.3%), dividend payers with no change (7.5%), non-dividend payers (2.8%), and dividend cutters (-0.3%).
Ned Davis Research data also show that dividend payers in aggregate show less volatility. This is also easy enough to understand.
When investor psychology turns sour, the psychology shifts to yield from growth. Investors seek havens. Cash is a haven, as are the stocks of companies that provide cash through dividends.
Dividends signal strength, another haven. How do you distinguish the strong from the weak? Dividends. A track record of uninterrupted dividend growth points to an enduring company.
There’s more. Dividend-growth stocks provide not only a haven during a declining market, they provide a vessel for higher returns during the subsequent market recovery.

An Example of Warren Buffett’s Secret

Veteran Berkshire stock Coca-Cola offers an illuminating example.
Buffett began accumulating Coca-Cola shares for Berkshire in 1987. He bought $1 billion worth of Coca-Cola stock in 1988. I’ll assume Buffett paid an average of $2.50 per share (split-adjusted) for his Coca-Cola shares. This is reasonable given the trading range in late 1987 and 1988.
Coca-Cola pays $1.56 per share in annual dividends today. The dividend generates a 62% yield on Berkshire’s cost basis. Coca-Cola increases its dividend roughly 6% annually. The annual increases are pedestrian, but the pedestrian can be powerful.
If Coca-Cola continues to increase its dividend 6% annually, Berkshire will receive $2.50 in annual per-share dividends by 2026. Berkshire will own an investment, Coca-Cola, that generates a 100% annual return (that will grow thereafter) in dividends alone in the next eight years.
And let’s not forget the actual shares. As the dividend goes, so goes the share price.
Coca-Cola’s dividend has been increased over the years to generate a 62% annual yield on Berkshire’s cost basis. Coca-Cola’s market value has increased to be worth 17.5 times Berkshire’s cost-basis price.
Come hell or high water, dividend-growth stocks ensure that you prosper under either scenario.

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