Sunday, June 23, 2013

Invest for Dividends

With the USA Federal Reserve pushing interest rates to historic lows, money has been forced into different asset classes in the great hunt for yield. Dividend-paying stocks can provide a stable source of cash flow that exceeds the rate on bonds or savings accounts, but investors may want to consider some timeless advice from the Oracle of Omaha before pulling the trigger.
Warren Buffett, one of the wealthiest men in the world, does not pay shareholders of Berkshire Hathaway (BRKA) a dividend. However, he has provided insightful views on the subject over the years. Buffett believes management should think long and hard about when to retain earnings and when to distribute them to shareholders. As he explains in a past shareholder letter, "Allocation of capital is crucial to business and investment management."
If earnings that are needed to run the business are paid out in dividends, the company could suffer from declining sales, lose its competitive advantage, and damage its financial strength. In fact, Buffett notes, "No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused."
At this point in time, Buffett believes Berkshire Hathaway should retain its earnings in favor of paying out a dividend. The company is able to put those earnings to better use and shareholders even receive benefits from Berkshire Hathaway investing in large stable companies that more often than not pay attractive dividends.