I have never advised my readers to invest in Warren Buffett’s Berkshire Hathaway (BRK-A).
And it’s not because a single share of the Class A stock costs $164,690 or because I think it is overvalued or because of any of the other usual reasons, for that matter.
The reason is actually quite simple.
It’s because Warren Buffett has vowed time and time again to never pay Berkshire shareholders a cent in dividends.
Consider this: In the most recent quarter, Berkshire Hathaway collected more than $1.35 billion in dividend and interest income from its holdings.
Yet none of that money made its way back to shareholders.
Granted, Buffett’s style is to try to turn that money into more money. But for me, I’d rather collect a steady stream of cash with which I can do what I please.
This is not to say that buying Berkshire’s Class A or Berkshire Hathaway B (BRK-B) shares is a terrible investment. In fact, it could be a nice addition to an income portfolio for people also looking for capital growth.
But when it comes to collecting steady and rising income streams, investing in dividend-paying stocks is one of the wisest choices an investor can make.
Apparently, I’m not the only one who feels this way. Other investors seem to prefer dividend stocks over non-dividend payers as well. That’s because these stocks not only provide income, they perform.
In fact, Ned Davis Research found that from 1972 through Sept. 30, 2012, U.S.-based dividend-paying stocks in the Standard & Poor’s 500 index returned 8.7 percent annually, far exceeding the 1.6 percent return for non-dividend payers.
As you can see, the difference between non-dividend payers and dividend payers is stark. If you invested $10,000 in non-dividend payers in 1972, you’d have $18,961 by September 2012. The same amount in dividend-paying stocks would be worth $302,800. That’s almost 16 times more.
This study supports my conviction that dividends are one of the most powerful investing tools available. However, as Chief Investment Strategist behind High-Yield Investing, I am biased.
But one look at Warren Buffett’s portfolio shows that the man likes dividend-paying stocks himself. Of his 40 holdings, 30 pay dividends. Not to mention, many of those companies have a proven track record of raising or maintaining dividends.
The simple fact is that if you’re ignoring dividends, you’re missing out on one of the safest ways to make money in the market.
But not all dividend stocks are created equal. I’m not suggesting that you just go out and buy a stock simply because it sports a high yield — that’s a risky proposition that can leave you with dividend cuts and losses if you choose unwisely.
In addition to high yields, you should be looking for high-quality income investments — ones that pay large, rising dividends with a degree of safety. When picking stocks to add to my High-Yield Investing portfolio, these are some of the criteria I look at when evaluating an income investment:
- Long track record of paying consistent and rising dividends.
- Matching history of improving earnings.
- Strong cash flow sufficient to pay dividends and then some.
- High projected growth that can lead to dividend increases.
- Zero or little debt, because debt-free companies have more cash to distribute.
- Noncyclical business models that can profit in all markets and at all times.
Very few stocks actually possess all these criteria. In fact, our research team ends up rejecting 99 out of 100 potential high-dividend stocks and funds because our test eliminates companies that may be unable to meet our standard for secure, steady and growing dividend payouts.
Action to Take –> Remember, there are no "absolute" guarantees. No matter how sound an investment may seem, anything short of a U.S. Treasury bond can lose money. But in my experience, if you’re researching a company and it fits most or all of these metrics, you may have found a winner.
And as I mentioned earlier, history clearly shows that investing in dividend-paying stocks is one of the best ways to beat the market and collect a healthy stream of income at the same time.
P.S. — In case you’re wondering what kind of stocks meet our standards, my research team has just identified 10 high-yield stocks that could give you a second income stream. Not only do these stocks pay dividend yields up to 15.2 percent, but they also have the potential to pay you an extra $25,000, $45,000 and even as much as $55,000 a year. To learn more about these stocks, including several names and ticker symbols, follow this link now.