Why Buffett doesn't pay dividends

Berkshire earned $1.1 billion in dividends last year, but Buffett refuses to pay one.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Few people would accuse Warren Buffett of being hostile to shareholders of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). He's open, forthright, and doesn't pad his own pockets at the expense of investors. With a $100,000 salary and 21.4% stake in the largely financial conglomerate, Buffett does well when his shareholders do.

Yet, there's one area where he comes up short. As Buffett acknowledged in his most recent letter to shareholders, "A number of Berkshire shareholders — including some of my good friends — would like Berkshire to pay a cash dividend."

For those of you that follow Berkshire, it'll come as no surprise that Buffett isn't a stranger to dividends. By his own admission, he "relishes" the ones Berkshire receives from most of the stocks it owns. In 2012, its earnings included a staggering $1.1 billion in dividends from its "Big Four" investments alone: Coca-ColaWells FargoIBM, and American Express.

Despite this, Berkshire has only paid a dividend once, and that was more than 40 years ago. "I must have been in the bathroom when the decision was made," Buffett is often quoted as saying.

Buffett believes, and with good reason, that shareholders will benefit more from Berkshire's retention and reinvestment of the funds than they would if the company paid them out. His letter offered competing hypothetical examples of the impact on a shareholder's net worth under both scenarios. By paying dividends, he estimates that he'd reduce the company's compound annual growth rate by 4%.

So that's the end of that, right? Well, not so fast.

While there's little question that Buffett is arguably the world's best capital allocator, he's not going to be around forever. And when he's no longer in control of Berkshire, it seems unlikely that his replacement will be able to completely fill his shoes.

One of the things Buffett is known for is "deal flow." When companies like Bank of America or Goldman Sachs need a stamp of approval, as they both have over the last few years, they go to Buffett (and notably, not Berkshire) — though, to be fair, B of A's CEO Brian Moynihan said that Buffett came to him.

And what does Berkshire get in return? Money, that's what, and lots of it.

For its $5 billion investment in Goldman, which spanned a mere four and a half years, Berkshire took home $3.2 billion in profit. And its equally sized $5 billion investment in B of A could end up being even more lucrative given the accompanying warrants to purchase 700 million shares of the bank for $7.14 a share. At today's price, that equates to a profit of $3.7 billion; excluding the dividend payments Berkshire has and continues to receive on its preferred shares.

The point is that, while Berkshire may very well carry on being great, there's little reason to believe that it can be as great without Buffett as it has been with him. And it's for this reason that Buffett's anti-dividend policy may need to be updated while he's still at the helm.

Fortunately, lots of great Aussie companies DO issue dividends, and The Australian Financial Review says "good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit." Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

The Motley Fool's purpose is to help the world invest, better. Click here for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by John Maxfield, originally appeared on fool.com.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »