Are dividends boring? Maybe, but boring tends to make for good investing. Dividend-paying stocks can provide a stable source of cash flow that exceeds the rate on bonds or savings accounts. However, investors may want to consider some timeless advice from the Oracle of Omaha before pulling the trigger.
Warren Buffett, one of the wealthiest men in the world, does not pay Berkshire Hathaway shareholders a dividend. Nonetheless, he has provided insightful views on the subject over the years, and holds some of the biggest dividend names in the market. Buffett believes management should think twice about when to retain earnings and when to distribute them to shareholders. As he explains in a past shareholder letter, “Allocation of capital is crucial to business and investment management.”
If earnings that are needed to run the business are paid out in dividends, the company could suffer from declining sales, lose its competitive advantage, and damage its financial strength. Buffett notes, “No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused.”
Currently, Buffett believes Berkshire Hathaway should retain its earnings in favor of paying out a dividend. The company is able to put those earnings to better use, and shareholders even receive indirect benefits from Berkshire Hathaway investing in large, stable companies that often pay attractive dividends. In fact, Berkshire Hathaway’s largest equity positions found in its 13F filing all pay dividends.
Let’s take a look at five Buffett-approved dividend stocks that do not appear to be destined for oblivion: