Why Warren Buffett Secretly Loves Income (and Hates Gold)

Warren Buffett hates dividends.
He hates PAYING dividends. But like every great investor, he loves getting paid.
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The top 10 holdings in Berkshire Hathaway’s (NYSE: BRK.b) stock portfolio account for 80% of portfolio value. All are dividend-growth stocks.
The top three holdings – Apple (NASDAQ: AAPL), Wells Fargo (NYSE: WFC), and Kraft Heinz (NASDAQ: KHC) – account for 43% of the portfolio. These three investments alone generate $2 billion of dividends annually for Berkshire. Because the dividend grows annually, the aggregate amount grows annually.
I didn’t hear Buffett chat up the wonders of dividend-growth stocks at the Berkshire Hathaway annual meet with shareholders this past weekend. Perhaps he wanted to avoid drawing attention to the obvious dichotomy:
Buffett likes receiving dividends; he dislikes paying them. Berkshire Hathaway doesn’t pay a dividend despite holding cash and cash equivalents valued north of $106 billion.
I have long argued that Berkshire should pay a dividend. I prefer that option over waiting interminably for a $50 billion company to go on sale. Given the rising tide of dividends received each year, Berkshire’s cash account would return to pre-dividend numbers in short order.
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Buffett and I disagree on Berkshire paying a dividend. I noted another significant disagreement that arose during the annual meeting. Buffett dislikes gold. He dislikes it to the point of disdain. I, on the other hand, see value in gold.
Buffett trumpeted stocks’ superiority over gold with a comparison. He compared the appreciation rate of the S&P 500 to gold. His time frame dated back to 1942. He picked 1942 because the United States was mired in a war. Fear ran higher than usual, though the prevailing belief was that the United States would win.
So, Buffett told us that a $10,000 investment in the S&P 500 in 1942 (the index didn’t actually exist then) would be worth $51 million today. The same investment in gold would be worth $400,000.
“In other words, for every dollar you could have made in American business, you’d have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines,” Buffett said.
Everything Buffett said was true. I found it disingenuous, though.
The starting year – 1942 – is too convenient for his argument. Buying stocks when fear runs high offers a conveniently low-cost basis. Saying to buy when fear runs high and actually buying are two different animals. Most investors won’t buy when fear runs high.
More important, the U.S. dollar was still tethered to gold. At least a notion of convertibility existed. It existed until 1971 when the tether was officially severed.
The nominal value of gold in dollars held steady from 1942 to 1971. The price of gold (in nominal dollars) rose to $42/ounce in 1971. It was $34/ounce in 1942. Including those years in a comparison tilts the table overwhelmingly in favor of stocks.
If Buffett had used 1971 as the starting point, his argument becomes less convincing.
A $10,000 investment in the S&P 500 would be worth $286,631 (assuming the S&P was bought at $95). A $10,000 purchase of gold would be worth $314,761 (assuming gold was purchased at $42/ounce).
To be fair to the S&P 500, dividends aren’t included in the calculation. Dividends, particularly reinvested dividends, would push the S&P 500 to the front, but not as far to the front as a 1942 starting point.
A comparison between the two assets is really nonsensical. It’s like comparing your car to your television. They serve different purposes.
Stocks are investments. They create cash flow. They generate wealth. Gold is an asset. It produces no cash flow. It’s an inflation hedge and a store of value. It’s not a matter of one or the other. They’re not mutually exclusive. They both will appreciate over time, though.
My portfolio is geared toward wealth creation. Stocks – dividend-paying stocks, in particular – dominate.
When I find the need to gear the portfolio toward wealth storage, you can be sure gold will be the lead storage asset.
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