What’s in Warren Buffett’s “secret sauce?” In his latest shareholder letter, the Oracle of Omaha shares one of his ingredients for success: dividend-paying stocks.
When equity markets are climbing, dividends often take a back seat to capital gains for investor focus. As we continue through a period of slower economic growth, and with interest rates rising from substantial lows, we shouldn’t underestimate the significance of dividends to portfolio growth.
Buffett’s investments are expected to generate a whopping $5.7 billion in cash this year, the majority from dividends.1 In his letter, he points to two successful dividend-paying investments and the contribution of both dividend growth and share price appreciation in growing portfolio values over time. He compares these to a high-quality bond, referring to a bond as a “flat-lined” investment that would retain, not grow, its value and pay an unchanged coupon rate from year to year.2 It’s good food for thought: dividends, alongside share price appreciation, can contribute to substantial growth over time. Consider an investment of $100,000 in the S&P/TSX Composite Index 30 years ago. It would yield $628,273 by investing in the index alone; yet, with reinvested dividends, the value would grow to $1,318,767.3 Buffett also credits a handful of solid investment choices and the magic of compounding over time.
Today, the S&P/TSX Composite Index has a dividend yield of around 3.12 percent, almost double that of the S&P 500 at 1.67 percent. 4 Many quality Canadian companies pay dividends, some with yields between 4 and 6 percent. Consider that the equivalent pre-tax interest income would be around 5.2 to 7.8 percent for an average high-net-worth taxpayer.5 Indeed, dividends still lead the way in tax savings over interest, with eligible dividends from Canadian corporations taxed at a rate that is lower than interest income
This is in addition to the prospect of future share price growth, as well as future increases in dividend payouts, as Buffett reminds us. Many companies that have historically paid dividends continue to pay dividends and may even increase these dividends through more challenging economic times — for example, the “Dividend Aristocrats,” a group of companies that have had 25 years of consecutive dividend increases in the U.S., and 5 years in Canada.
Dividends remain an excellent income source that can meaningfully contribute to portfolio growth over time. Don’t overlook the fact that they continue to work hard behind the scenes within a portfolio.
• On the Markets— “It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. Stocks and bonds are baffling, their behavior usually understandable only in retrospect.”
• On Investing — “You have to keep learning if you want to become a great investor. When the world changes, you must change.”
• On Investing Success — “I have made many mistakes…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.”
• On Giving — “(Many of our shareholders) live well and eventually dispose most of their funds to philanthropic organizations. Sometimes, the results have been spectacular. I watch with pleasure…the disposition of money unmasks humans.”
• On Life — “All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary — and then behave accordingly.”
• On the Future — “We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.”
The information contained herein has been provided for information purposes only. Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information has been provided by J. Hirasawa & Associates and is drawn from sources believed to be reliable.
The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) and the authors do not guarantee the accuracy or completeness of the information contained herein, nor does WAPW, nor the authors, assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
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