The Warren Buffett Approach To Income Investing – ValueWalk Premium
Berkshire Hathaway Warren Buffett

The Warren Buffett Approach To Income Investing

Warren Buffett is arguably the most successful investor of all time.  His $80+ billion net worth speaks to how effective his investing methods have been.

Q1 hedge fund letters, conference, scoops etc

Berkshire Hathaway Warren Buffett

Interestingly, the bulk of securities in Buffett’s portfolio today are dividend growth stocks.

Buffett’s Top 8 holdings make up 75% of his portfolio.  Each of these holdings along with its corresponding dividend yield is listed below:

  1. Apple (AAPL) – 1.6%
  2. Bank Of America (BAC) – 2.1%
  3. Wells Fargo (WFC) – 3.8%
  4. Coca-Cola (KO) – 3.1%
  5. American Express (AXP) – 1.3%
  6. Kraft-Heinz (KHC) – 5.1%
  7. U.S. Bancorp (USB) – 2.8%
  8. JPMorgan Chase (JPM) – 2.9%

This comes to a weighted average dividend yield of 2.5%.  For comparison, the S&P 500 currently has a dividend yield of 1.9%.

A hint as to why Buffett’s top 8 holdings are all in dividend paying securities comes from Buffett’s position as both a businessman and an investor.

“I am a better investor because I am a businessman, and a better businessman because I am an investor.” – Warren Buffett

As a businessman, Buffett looks for companies that are able to generate cash with little reinvestment, and return that cash to him so he can reinvest it.

Interestingly, that’s exactly what dividend stocks do.  They throw off cash and return it to their owners for reinvestment into other securities.

This creates a virtuous cycle of wealth compounding when followed diligently over the long run.

Now Warren Buffett is in a very different situation than almost everyone else alive.  Buffett more than almost anyone does not need to hunt for higher yielding securities.  Having an $80 billion net worth means that safety is more important than yield for Buffett today.

But even investors who need portfolio yielding 4%, 5%, or 6% should still make safety a paramount priority.

The Warren Buffett approach to investing can be nicely summed up in the quote below:

“We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business:

(1) favorable long-term economic characteristics;

(2) competent and honest management;

(3) purchase price attractive when measured against the yardstick of value to a private owner; and

(4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge.”

– Warren Buffett

Said succinctly, Buffett looks to invest in businesses that are likely to grow their profits over the long run, with quality management teams.  And he looks to invest in these businesses when they are ‘priced attractively’.

As an income investor, the only thing left to add is to require a dividend yield appropriate for your portfolio.

With this in mind, I believe the Warren Buffett approach to income investing would look like this:

  1. Businesses with strong and durable competitive advantages
  2. And shareholder friendly management teams
  3. With a stock trading at or below fair value
  4. And a dividend yield that makes sense for your personal situation

While these points are easy to read, actually finding securities that match the above criteria is easier said than done.

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Ben Reynolds

Sure Dividend

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