Dear Investment U,
Although it was a very difficult decision to make, I am leaving Investment U to take over for Warren Buffett at Berkshire Hathaway. Thank you for everything.
There. The resignation letter is ready to go. Now, all I need is the call from Warren’s people and it’s a done deal. I’m expecting the call any day now.
As you may have heard, in Berkshire Hathaway’s (NYSE: BRK.A) (NYSE: BRK.B) most recent annual letter to shareholders, the Oracle of Omaha said that he has a successor picked out.[ad#Google Adsense 336×280-IA]Interesting that he picked me without having ever actually spoken to me.
But I guess he’s read how I’ve been pounding the table on dividend-paying stocks.
You see, Warren loves dividends and as he has said in the past, his preferred holding period is “forever.”
That makes two of us.
According to Forbes, out of 33 publicly held stocks in Berkshire Hathaway’s portfolio, 27 of them pay dividends.
Berkshire will collect well over $100 million in dividends each from American Express (NYSE: AXP), Coca-Cola (NYSE: KO), IBM (NYSE: IBM), Kraft Foods (NYSE: KFT), Procter & Gamble (NYSE: PG) and Wells Fargo (NYSE: WFC). In Coca-Cola’s case, it will be well over $300 million.
Like Warren Buffett, I also like stocks that pay robust dividends and prefer to hold on to them forever.
You see, one of the sure ways to increase your wealth and stay ahead of inflation is to buy stocks that grow their dividend at a healthy clip every year.
Coca-Cola currently pays a 3% dividend yield. If the company continues to grow the dividend at an average of 10% per year as it has done over the past 10 years, in 2022, the yield would be a juicy 7.7%. In 15 years it would be 11.5%, and in 20 years a whopping 18.7%.
It’s not that hard to think that you could own a stock like Coca-Cola in your portfolio for 20 years if you don’t panic and sell anytime the stock or the market heads lower.
And in any interest rate environment, 18.7% is going to be pretty good.
If you don’t need the income right now, you’re better off reinvesting the dividend.
An investor who bought $10,000 worth of Coca-Cola shares at the end of 2001 and reinvested the dividend wound up with $19,204 at the end of 2011. Not bad considering the S&P 500 barely budged in those 10 years.
If you bought $10,000 worth in 1991, it turned into $51,080 – for a return of over 400%.
From 1981 on – your $10,000 became worth a startling $999,554.
Yes, 30 years is a long time. But buying great companies with decent starting dividend yields, that are growing those dividends every year is the best way that I know of to save for retirement, a college education, or just a rainy day. Other than getting lucky and hitting a home run by being early on a stock like Microsoft (Nasdaq: MSFT), I don’t know of any other investments that would have turned returned 100 times your money in that period of time.
You need to have patience so that you can let the dividends compound over time. That’s what will create the real wealth. When you reinvest dividends, each quarter you receive more of a payout as you own more and more shares. As the years go by, it starts to add up in a hurry.
And if you need the income today, buying stocks that raise their dividends every year ensures you have more income each year and stay ahead of inflation.
Warren Buffett understands that. So do I.
It’s why I’m sitting by the phone, waiting. Warren, call me.
Marc Lichtenfeld[ad#jack p.s.]
Source: Investment U