Warren Buffett, one of the most famed investors, still holds true to his forever motto that holding steady and being patient are key to successful investing.
In addition, as The Motley Fool reported, he is known for investments that include safe dividend stocks, which generated hefty returns that he then reinvested back into his investments, generating even greater returns.
However, during bear markets and recessions, these stocks can be hard to find.
“Value investing is an approach that can, and sometimes does, take years to generate positive returns. It’s information-intensive and takes real expertise in knowing and understanding how a certain type of firm is run, what the market for its various assets is like and other very specific aspects of a business. It’s very difficult for amateur investors to dabble in profitably,” said Peter C. Earle, economist, American Institute for Economic Research.
Earle added that many dividend-paying firms are past the point in the corporate lifecycle where they are likely to produce above-average rates of growth — they become “cash cows,” which attract long-term, income-focused investors with the consistency of their dividend payments rather than the promise of explosive growth.
“To maintain their dividend yield, those firms usually keep ample cash reserves on hand to ride out bad quarterly earnings periods or other negative surprises. It’s not surprising that publicly traded companies meeting that description would be sought by Buffett/Berkshire Hathaway. They tend to be safe [and] predictable, and qualified dividends have tax advantages,” said Earle.
Plus, as Cathy Seifert, vice president at CFRA Research, explained, despite the fact that Berkshire Hathaway does not pay its shareholders a dividend, Buffett has long extolled the benefits of investing in dividend-paying stocks. And he follows his own advice.
“Berkshire collected over $6 billion in dividend income in 2022, up from just over $5 billion in 2021. It’s also important to note that many of Berkshire’s more strategic investments have included invested in preferred shares, which usually pay a higher dividend than many common shares,” she said.
Finally, as Buffett himself said in his 2023 letter to shareholders: “The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.“
The Oracle of Omaha is a long-term investor who focuses on individual stocks that he considers to be undervalued, ignoring the economic cycle.
“However, in a recession, the overall stock market is very likely to decline which would create buying opportunities. He seeks companies with growth potential that are reasonably priced and returning capital to shareholders through both cash dividends and stock buybacks,” said David Kass, clinical professor of finance at University of Maryland, Robert H. Smith School of Business.
Kass noted that Apple currently represents close to 50% of Berkshire Hathaway’s equity portfolio, and at the 2023 Berkshire Hathaway annual meeting on May 6, Buffett described Apple as being Berkshire’s best business.
“He began to accumulate his stake in Apple in 2016. Berkshire’s investment in Apple of $31 billion is worth about $175 billion today, representing a profit of $144 billion. Since Apple has a large stock buyback program, Berkshire’s 5.6% stake in Apple is likely to grow to 6% in the near future without Berkshire buying any additional shares,” he added.
Kass noted that Louisiana Pacific is a relatively small position, which indicates it was likely purchased by one of Buffett’s portfolio managers, Todd Combs or Ted Weschler.
“Over the past two years it has bought back between 10% and 20% of its shares each year,” Kass said.
As The Motley Fool reported, this rather small position is unique in that Buffett appears to be taking a stake in another economically sensitive company at a time when most investors are looking to play defense.
“What does Buffett know that we don’t? I guess we’ll find out. Many know that Buffett is a perma-bull when it comes to the economic outlook for America,” according to The Motley Fool.
Indeed, in his 2021 letter to shareholders, Buffet said to never bet “against America.” Buffett says that while much of finance, media, government and tech are located in coastal areas, it’s easy to overlook the many miracles occurring in middle America.
“In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking. Beyond that, we retain our constitutional aspiration of becoming “a more perfect union.” Progress on that front has been slow, uneven and often discouraging. We have, however, moved forward and will continue to do so. Our unwavering conclusion: Never bet against America,” he wrote at the time.
Coca-Cola, if history is any guide, is safe, said Robert R. Johnson, Ph.D., CFA, CAIA, professor of finance, Heider College of Business, Creighton University; and a Berkshire Hathaway shareholder for over 40 years.
“The firm is a true dividend aristocrat, having increased dividends every year for the past 61 years. Coca-Cola has a true devotee — of both the product and the stock — in Berkshire Hathaway’s Warren Buffet,” he said, adding that the brand name is ubiquitous.
“When I interviewed Mr. Buffett at a CFA Institute event in 2011, I asked him what was the most valuable brand name in the world. He replied “Coca-Cola” and indicated that consumers were willing to pay to buy branded merchandise, effectively advertising for the company,” he added.
In his 2023 shareholder letter, Buffett noted that part of his “secret sauce” was that in August 1994, Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola it now owns.
“The total cost was $1.3 billion — then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie [Munger] and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow,” he wrote.
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