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Warren Buffett's Dividend Growth Portfolio

Warren Buffett (Trades, Portfolio)’s strategy has evolved over the years. The Oracle of Omaha looks for high quality businesses trading at fair or better prices. When asked about his style, Warren Buffett (Trades, Portfolio) says he is:

85 percent Benjamin Graham and 15 percent Philip Fisher
- Warren Buffett (Trades, Portfolio)

Philip Fisher popularized growth investing and investing large percentages of your portfolio into a few businesses that have favorable long-term outlooks. The 85 percent Graham portion is value investing; paying less for a stock than its intrinsic value. Warren Buffett (Trades, Portfolio) looks for solid growth businesses that are trading at fair or better prices, not cheap businesses that have adequate growth.

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price
- Warren Buffett (Trades, Portfolio)

Warren Buffett (Trades, Portfolio)’s Top 7 Picks

That is how Warren Buffett (Trades, Portfolio) says he invests. When you examine his portfolio, it is consistent with his advice. Warren Buffett (Trades, Portfolio)’s Top 7 positions are listed below:

  • Wells Fargo (WFC), 20% of portfolio
  • Coca-Cola (KO), 16% of portfolio
  • American Express (AXP), 13% of portfolio
  • International Business Machines (IBM), 12% of portfolio
  • Procter & Gamble (PG), 4% of portfolio
  • Exxon (XOM), 4% of portfolio
  • Wal-Mart (WMT), 4% of portfolio

Over the last 5 years, every single one of Warren Buffett (Trades, Portfolio)’s Top 5 holdings has paid increasing dividends.


Source: Ycharts

Dividend Aristocrats and Warren Buffett (Trades, Portfolio)

Of the Top 7 businesses in Warren Buffett (Trades, Portfolio)’s portfolio, 4 are Dividend Aristocrats: KO, PG, XOM, & WMT. It is not a coincidence that each of the Top 7 businesses in Warren Buffett (Trades, Portfolio)’s portfolio pay increasing dividends, and 4 are Dividend Aristocrats. Warren Buffett (Trades, Portfolio) looks for businesses with the ability to grow profitably year after year on a consistent basis. He also looks for businesses that return profits to shareholders in the form of dividends.

What About WFC, AXP, & IBM?

Wells Fargo had a long history of consecutive dividend increases before the financial crisis. The company reduced its dividend from $0.34 to $0.05 at the bottom of the market in early 2009. Wells Fargo has since recovered, and now pays a dividend of $0.35 per share.

Source: Wells Fargo Dividend History

American Express paid a small $0.18 per share dividend each quarter from 2008 through 2011. In 2012, the company increased its quarterly dividend to $0.20 per share, and then to $0.23 in 2013, and finally $0.26 per quarter in 2014. The company now increases its dividend payments each year, and is very likely to continue to do so.

Source: American Express Dividend Information

IBM has been regularly increasing its dividend payments since 1999. The company now has a 15 year history of dividend increases. IBM is likely to continue increasing its dividend year after year in a similar fashion as Warren Buffett (Trades, Portfolio)’s other top holdings.

Source: IBM Investor Relations

Buy Low, Sell Never

Our Favorite Holding Period is Forever
- Warren Buffett (Trades, Portfolio)

Warren Buffett (Trades, Portfolio) has held many of the businesses on this list over very long time frames. He has held American Express since 1964, Coca-Cola since 1988, and Wells Fargo since 1989. Warren Buffett (Trades, Portfolio) has had ample opportunities to sell these businesses over the last several decades. According to the biography Snowball, Warren Buffett (Trades, Portfolio) wanted to sell Coca-Cola in the late 1990’s when the company had a P/E ratio in the 50’s, but didn’t as he was on the company’s board.

His yearning to sell Coca-Cola in the late 1990’s shows that there is a time to sell successful businesses; when valuation multiples become absurd. The only other time to sell a business is when its competitive advantage is deteriorating. The 2 Sell Rules from the 8 Rules of Dividend Investing reflect the only two reasons to sell a high quality business. The 2 Sell Rules are:

Sell Rule # 1 – The Overpriced Rule

“Pigs get fat, hogs get slaughtered”

– Unknown

Common Sense Idea: If you are offered $500,000 for a $250,000 house, you take the money. It is the same with a stock. If you can sell a stock for much more than it is worth , you should. Take the money and reinvest it into businesses that pay higher dividends.

Financial Rule: Sell when the normalized P/E ratio is over 40.

Evidence: The lowest decile of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to 2010.

Source: The Case for Value by Brandes Investment Partners, Page 2

Sell Rule # 2 – The Survival of the Fittest Rule

“When the facts change, I change my mind. What do you do, sir?”

– John Maynard Keynes

Common Sense Idea: If a stock you own reduces its dividend, it is paying you less over time instead of more. This is the opposite of what should happen. You must admit the business has lost its safety and reinvest the proceeds of the sale into a more stable business.

Financial Rule: Sell when the dividend payment is reduced or eliminated.

Evidence: Stocks that reduced or eliminated their dividends had a 0% return from 1972 through 2013.

Source: Rising Dividends Fund, Oppenheimer, page 4

Investing Like Warren Buffett (Trades, Portfolio)

Warren Buffett (Trades, Portfolio) invests heavily in dividend growth stocks, and holds them for the long run. Mocking his investment style is fairly simple, but requires patience and discipline. Warren Buffett (Trades, Portfolio) tends to purchase high quality dividend growth stocks when they trade at fair or better prices. The market is currently overvalued due to artificially low interest rates from the federal reserve to bolster the economy.

P/E Ratio of Warren Buffett (Trades, Portfolio)’s Top 7 Stocks

  • Wells Fargo (WFC), P/E of 12.81
  • Coca-Cola (KO), P/E of 22.32
  • American Express (AXP), P/E of 18.74
  • International Business Machines (IBM), P/E of 12.82
  • Procter & Gamble (PG), P/E of 21.88
  • Exxon (XOM), P/E of 13.77
  • Wal-Mart (WMT), P/E of 15.94

Of Warren Buffett (Trades, Portfolio)’s Top 7 picks, Wells Fargo, IBM, and Exxon appear cheap based on the P/E ratio. Walmart appears fairly valued. American Express, Procter & Gamble, and Coca-Cola appear to be somewhat overvalued.

Of the stocks in Warren Buffett (Trades, Portfolio)’s portfolio, both Exxon and Wal-Mart are Top 10 stocks based on the 8 Rules of Dividend Investing. IBM, American Express, and Wells Fargo are not included in the Sure Dividend system because they do not have 25+ years of dividend payments without a reduction.

Final Thoughts

Investing in high quality businesses that reward shareholders through profitable growth and increasing dividends generates wealth over time. Warren Buffett (Trades, Portfolio) has utilized this approach to compound his wealth over the last several decades. The key to the strategy is identifying businesses with a strong competitive advantage, discipline, and patience.

About the author:

SureDividend
I run Sure Dividend, a website that finds high quality dividend stocks for long-term investors using the 8 Rules of Dividend Investing

Visit SureDividend's Website


Rating: 5.0/5 (7 votes)

Voters:

Comments

petershk
Petershk premium member - 4 months ago

You make some good points but I think you're over emphasizing Buffett's focus on dividends. In his position he prefers if companies successfully reinvest their cash flow into other high return vehicles. The reason is if coca cola can reinvest $1000 at 15% a year vs pay him a dividend, over time that compounds much higher because he gets to defer the taxes. Also he has billions in cash he wants to invest but not enough opportunities so in his situation dividends paid just make that "problem" worse.

I think a steadily increasing dividend is a good sign that a company is both a great business and has competent management. But if coke and Amex cut their dividend to 0 because they found a better return for their capital Buffett wouldn't sell anything... In fact he might buy more because perhaps the stocks would drop. Flip side if they got into trouble and borrowed to keep paying/increasing their dividend to look good, he may sell them because that would indicate either short sighted management or a deterioration in competitive advantage.

just my thoughts.

hermann

Sure Dividend
Sure Dividend - 4 months ago
Petershk, I agree with you on most of your points. I don't know Warren Buffett (Trades, Portfolio) personally, but he has said repeatedly that he is intereted in compounds. Dividend growth stocks show proof that a business can grow profitably over time.

Warren Buffett (Trades, Portfolio) says to sell a business when it loses its competitive advantage/operations begin deteriorating. An example is when he sold Freddie Mac before the financial crisis. When a business cuts its dividend it usually (though not always) means that the business is deteriorating, or management fears it will.

If a business has high debt and a high payout ratio, it generally would not make a good investment, as you accurately stated in your comment.

Thanks for reading and for the insightful comment!

chanwall
Chanwall - 4 months ago

Very useful ideas contributed by Petershk, thank you!!

I also appreciate Hermann's comment

chanwall
Chanwall - 4 months ago

Very useful ideas contributed by Petershk, thank you!!

I also appreciate Hermann's comment

The challenge is always the determination of the intrinsic value, which may then enable us to evaluate if the market price is fair/good

chris711
Chris711 - 4 months ago

Because of the significant amount of capital Berkshire has, Buffett parks it in the best companies that also pays a dividend. It uses those dividends to buy stocks or companies. To think investing for just dividends in megacaps will make you rich, you're kidding yourself. By the time you get rich from dividends, you'll probably be 100 years old. If you look at the best investors the last 50 years, they didn't get there from just dividends. They got there from growth and value. Seriously, how much bigger can KO get 20 years from now? It certainly won't give you 300,000% return that Bershire got. Not from dividends.

Sure Dividend
Sure Dividend - 4 months ago
Very true Chris711, dividend growth stocks will not make you rich quickly. Dividend stocks, dividend growth stocks, and Dividend Aristocrats have substantially outperformed the market however. You won't get a 30% per year returns every year, but you will get solid returns that compound over time. Here are a few links to substantiate my claims: Dividend Aristoctats have outperformed the S&P 500 by 2.88 percentage points per year over the last decade: [www.suredividend.com] Dividend paying stocks have outperformed non dividend paying stocks by over 6 percentage points per year from 1972 through 2013: [public.dreyfus.com] Growing dividend stocks have outperformed dividend stocks with unchanged dividends by 2.4 percentage points per year: [www.suredividend.com]
snowballbuilder
Snowballbuilder - 4 months ago

interesting discussion .... i wuold like to add my opinion:

Investing regularly in good and predictable company whit consistent earning , good and increasing dividend and low pay out is a good way to become financial indipendent and build wealth and a long dividend tree.

but (just my opinion) probably its not the way Buffett , Munger , Philip Fisher , used to become extremely rich

they invest really hard and focused only when there was a big fat pitch (usually when the blood were on the street ) and patiently sit on their asset and build up cash for the rest of time .

they were looking for few mispricing bet and for compounding their capital (the best way to compound is to rinvest internally at high rate of return and deferring taxes and not paying dividend)

so they were probably looking for big long term capital apprecciation more and before than dividend .

just some thoughts

petershk
Petershk premium member - 4 months ago

Right. I think it's very important to decide who is your master and who is your bitch :).

For speculators, stock price is the master, for investors long term return on investment is master. Thus whether or not coke or Pepsi or Facebook are good investments has to do with (a) what return you get over the long term (say 10-20 years). (B) how sure you are (c) how much it costs you to find out.

i try to close my eyes and imagine myself 20 years from now... Will I be drinking coke? Probably. Will I be posting on facebook? No idea. Maybe facebook will be a huge company, maybe they will be gone. I have no idea and I also have no good way of increasing my confidence one way or the other. Of course that may change.

Thus assuming that different investments have different levels of "how sure you are" the task is to compare the return of various comparable companies.

So if we think about companies as machines that print money for us it's about how reliably they print it, how much it costs to maintain the machine and how much we can buy it for... Over time. So a money machine that prints 20$ every day for 20 years and costs 10$ every day reliably might be more valuable than one that produces -5 to 30$ randomly every year and blows up every 5-20 years and costs 10,000$ to replace. The reliability comes from the various things that give a durable competitive advantage: low capex, pricing power, low cost leader and so on.

Buffett bought his coke money printing machine for around $6. It's doing about $2.30 of pretax earnings so that's an amazing annual return on that 6$ purchase, it's virtually guaranteed and he doesn't pay taxes on it. Unless something way better comes along there is no reason to ever sell that machine.

Of course you and I can't buy coke for $6, but if the global population goes up and the number of people with access to coke goes up, it's safe to assume that per share earnings will also go up (maybe just inflation alone). At cokes 10% growth that $2.30 becomes $15 in 20 years. So would you pay 41$ for a 15$/year pre tax per share payout 20 years from now? Maybe that's too expensive. Maybe 30$? Or 20?

i think that's the big difference between coke and facebook (which investors have decided is worth more than coke btw :). With most companies I can't even ask that question.

think of it this way, if you had 193 billion laying around would you buy all of Facebook or would you buy all of coke plus 14 billion of walking around money :). Or would you buy 10 year government bonds, or a bunch of reits or maybe an s&p index fund.

thats kinda how I think about it.

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