Thursday, 12 February 2009

Put Warren Buffett in Your Corner

Put Warren Buffett in Your Corner
Motley Fool StaffFebruary 11, 2009

Dividend stocks may be the best way to follow Warren Buffett's famous rules:

Rule No. 1: Never lose money.

Rule No. 2: Never forget rule No. 1.

But that shouldn't be surprising.

Playing the part of the investor whose aim is to never lose money is to study businesses that rule boring industries, make real products, and earn heaps of cash flow. More often than not, these types of stocks also offer generous dividend yields.

Consider Buffett's portfolio. Plenty of the stocks held by Berkshire Hathaway yield more than the S&P 500 average of about 3.2%. Here's a sampling:

CurrentDividend Yield
American Express (NYSE: AXP)
Coca-Cola (NYSE: KO)
Kraft Foods (NYSE: KFT)
ConocoPhillips (NYSE: COP)
Constellation Energy (NYSE: CEG)
Wells Fargo (NYSE: WFC)
Sources: SEC filings, Yahoo! Finance.

Get 97% of the market's returns automatically

Surely, some of this is coincidence. Berkshire has billions to invest. Buffett and curmudgeonly partner Charlie Munger are unlikely to buy stock in anything but the largest large caps, and large caps are always more likely to pay dividends.

Nevertheless, research conducted by Dr. Jeremy Siegel shows that 97% of the stock market's return from 1871 to 2003 can be traced to dividends. I think we can fairly give superinvestors like Buffett and Munger credit for following a smart strategy, even if they don't follow it to the letter. Buffett and Munger, you see, don't reinvest dividends as Siegel's research suggests you should. They've done better by investing cash from dividends into their best ideas.

But what's good for them isn't necessarily good for you.

That's why many of America's millionaires are buying, holding, and reinvesting in the stocks of sturdy businesses that have a history of increasing their dividend payouts. It's a no-brainer way to get rich. Really rich.

From Buffett's portfolio to yours

I'll not pretend that owning dividend-paying stocks makes you like Buffett or Munger. It doesn't. But isn't it nice to know that if you do choose to invest in cheap dividend payers, you're in good company?

For more on dividends:
An Opportunity We Haven't Seen in 50 Years
The Best Stock to Own
The 10 Best Dividend Stocks of the Past Decade
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