Dividend Stock Strategies
You see, aside from the paycheck Buffett received from his "day job," Warren earned an estimated $42,583,971 in income last year from the dividends spun off from his own personal holdings.
Those dividend money machines accounted for 99.76% of his estimated 2009 income, keeping him flush with cheeseburgers and business jets.
And with the yields on the benchmark 10-year Treasury note hovering in the 3.8% range and the market struggling to rebound, Buffett's dividend portfolio will likely outperform in 2010, adding to his massive fortune.
True to form, he buys them, holds them, and watches them grow. Simple — but effective.
But that is not the only advantage to be had by building a portfolio like Warren's. The other benefits of a divided-based portfolio include:
Safety - If preserving your money is as important to you as it is to Buffett, dividend investments are preferable because of their low risk.
Diversification - If the balance of your portfolio tilts towards growth, dividend investments can help you diversify acting as buffer against unpredictable market swings.
Access - Dividend-paying stocks offer investors ready access to their income streams, unlike similar investments in 401(k)s and IRAs, which are retirement based and carry penalties for early withdraws.
So don't believe for a second that income investments are boring and are only suited for the gray-haired crowd. The larger truth is that dividend-paying stocks should be a part of every well-balanced portfolio — young, old, or somewhere in between.
Here's why...
Even in bear markets, dividend-paying stocks typically do well, especially if those companies have a strong history of increasing the dividend payout.
That's because investors win two ways when a company increases its dividend. First, the yield on your initial investment goes up with the dividend; second, and even better, the dividend increase often propels the share price higher.
That's an unbeatable combination in today's tough markets. And it's the reason that investors are so eager right now to gobble up companies with solid dividend yields.
So What is Dividend Yield?
In short, a dividend yield is a cash payout that you receive for simply being a shareholder, sort of like receiving a bonus based on a company's earnings.
Moreover, these "bonuses" also offer lower tax rates than similar investments in savings, CDs, or money market accounts. Thanks to a change in the tax law, dividends are now taxed at only 15%. That's considerably better than the 35%+ taxation levied against ordinary income. (Even though these tax changes may eventually be eliminated.)
Dividend yield is simply your rate of return from the dividend payouts, exclusive of any stock price appreciation. It's calculated by dividing the dividends you receive over a year's time by the price you paid for the stock.
I'll give you an example: Your dividend yield is 5% if you paid $20 per share, and you receive $1 per share in dividends ($1/$20) over the 12 months following your purchase.
Dividend yield, however, is not a fixed number. It changes along with the share price. For instance, say someone else buys the same stock a week later when the share price had moved up to $25. Instead of 5%, their dividend yield would only be 4% ($1/$25).
However, as Warren Buffett would surely tell you, picking successful dividend-paying stocks is not as simple as buying the stocks with the highest yields. In fact, the stocks with the highest yields often trip up investors the most.
So if you really want to invest like Warren Buffett, you can spend your time pouring over his annual letter to shareholders, or you can create a dividend money machine of your own by following the famed investor's own personal holdings.
Warren Buffett's Personal Portfolio
The latest filings from his personal portfolio showed that he had multi-million-dollar stakes in 10 companies as of the end of last year.
Per the SEC, they included investments in:
Wells Fargo (NYSE: WFC).............................. 14, 812,857 shares
Johnson & Johnson (NYSE: JNJ)......................4,973,200 shares
Procter & Gamble (NYSE: PG)..........................4,375,000 shares
Kraft Foods (NYSE: KFT)..................................8,000,000 shares
Wal-Mart (NYSE: WMT)....................................4,200,000 shares
US Bancorp (NYSE: USB)...................................8,365,000 shares
General Electric (NYSE: GE)..............................7,777,900 shares
United Parcel Service (NYSE: UPS).....................1,429,200 shares
Ingersoll-Rand (NYSE: IR) .....................................636,000 shares
Exxon Mobil (NYSE: XOM)...................................421,800 shares
Among them, they pay an average dividend yield of 2.3%, with Buffett concentrating 77% of his investments in the top five stocks. That plan allows Buffett to "get by" on the $1,923.08 found in his weekly paycheck.
That, my friends, is how the other half lives.
The good news is that by building a five stock dividend portfolio of your own, you can jump on the road to wealth right there with 'em.
Next week, I'll be detailing the one that got away — a stock with a 6.6% dividend yield that I think even Warren would be happy to own.
Your bargain-hunting analyst,
Steve Christ
Wealth Daily
Investment Director, The Wealth Advisory
Dividends
The benefit of investing in dividend stocks is one of those motherhood investing topics. Everybody accepts the benefits of dividends, but no one gets too excited about them. Now, Bay Street is starting to get excited about dividends.
For those that are more conservatively minded, we do think.... that a long term strategy of stressing quality and the ability to maintain and grow dividends will be a winning one in the type of environment we see over the next five years, Nick Majendie of Scotia Capital Markets wrote in a recent note to clients. He said that there has been an investor tilt toward riskier stocks and sectors since the market hit bottom in March. But he believes this trend will have run its course by next summer, prompting investors to gravitate to stocks with high yields and the potential to increase their dividend payouts.
Majendie stressed the importance of dividends by showing that the Dow Jones Industrial Average’s 10 per cent average annual total return over the past 50 years is made up of 6 percentage points of capital appreciation and 4 points of dividend yield. In the past 10 years, the Dow’s total return was 5.4 per cent, with 2.2 points coming from dividends and 3.2 points from capital gains. The lesson here for investors: over the long term, dividends are a key component of stock market returns. If you’re not receiving dividends, then, you could be at a disadvantage. Over at CIBC World Markets, economists Avery Shenfeld and Peter Buchanan recently issued a report highlighting the extra yield investors can pick up by moving into dividend stocks from money market funds and bonds. The telecom services, utilities and real estate sectors on the TSX all have dividend yields of between 5 and 5.5 per cent, with media, banks, and health care in the area of 4 per cent. Meantime, there's close to $100-billion sitting in money market funds and brokerage accounts earning virtually nothing right now after fees, and savings accounts paying under 1 per cent for the most part. Dividend cuts are a risk, they note. However, the number of firms reducing or eliminating dividends has fallen sharply from a peak early this year. With the stock markets surging as we head into the final month of 2009, there aren’t many obvious bargains left. Dividend stocks may be as close as we come.