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Berkshire Hathaway Does Not Pay Dividends                                   


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Most value investors are familiar with the term “value trap”. But how many investors are familiar with the term “dividend trap”? There are many investors who only seek out firms that pay out dividends mainly to receive income. At first glance, that makes sense. However, why is it that Warren Buffet’s Berkshire Hathaway firm has never paid a dividend and does not have any plans to going forward? In short it is a bad idea.

Let’s look at the facts. According to research by Eugene Fama and Kenneth French done in 1999 only 20.8% of firms actually pay a dividend which is down compared to 1978 when 66.5% of the firms where paying a dividend. Not a good trend. Typically dividend paying firms are very large capitalization sector. At one point, around 2014, 410 of the S&P500 paid dividends. All 30 of the DJIA pay dividends. But in contrast, only about 52 of the tech heavy NASDA100 pay dividends.

So if you look at the big picture for a moment. You will see this is a very limited strategy and is getting harder to implement as the number of dividend paying firms are declining. Plus, you have more aging individuals trying to use the same strategy. Recall what Sir John Templeton said, “If you want above average returns, you can’t follow the crowd.”

What then does one do? Well there are two points worth sharing. First point is to simply create your own dividend by periodically selling some share of your stock when you need the cash. This is often referred to a “homemade dividends”. You just invest in firms that are undervalued looking for capital appreciation and then sell shares to provide the income you desire. This also avoids the limited number of dividend firms and the crowd concerns. The second point is why Berkshire Hathaway does not pay a dividend. This is not by accident. When you are paid a dividend the federal and state tax services take a portion and thus are reducing your ability to accumulate wealth. You basically have a much smaller portion of your portfolio than had you invested in non dividend paying stocks. Not to mention the lost compounding affect on the portions taxed.

In a nutshell, seek out value investments in all capitalization sizes, whether they are large, medium or small that do not pay a dividend and avoid the entire taxation on dividends which will help you build your wealth. And from time to time sells share for some cash. While selecting capital appreciation we have had a few firms that also paid a dividend. For example, in 2013 we held BP and it paid a dividend of about 6.0%.

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Published: 11/1/17




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