Over Berkshire’s history, Buffett writes, “the sell-off policy would have produced results for shareholders dramatically superior to the dividend policy.” Money that would have been paid out as a dividend was invested by the world’s greatest investor. By 2012, that $0.10 per-share dividend paid in 1967 while Buffett was in the bathroom would have been worth $0.90 if put in Treasuries, $4.83 if invested in the S&P 500, or $326 if invested in Berkshire.
And at any time, Berkshire shareholders could have sold a portion of the gain, creating their own annual dividend.
Selling shares is also the most tax efficient way to reward shareholders. “Under the dividend program, all of the cash received by shareholders each year is taxed whereas the sell-off program results in tax on only the gain portion of the cash receipt,” Buffett wrote.
Back at the University of Florida, Buffett explained when a company should forgo dividends: “The real question is whether we can keep retaining dollar bills and turning them into more than a dollar at a decent rate.”
Most businesses can’t, at least compared with other investment opportunities. In an interview last year, investor Rob Arnott criticized companies retaining huge portions of their earnings:
There’s an arrogance to the notion that our best internal reinvestment opportunity within our company is better than our shareholder’s best reinvestment opportunity in the entire world of investing. And that’s what tacitly being said by hanging on to all of the earnings.
But that “arrogance” makes sense with Buffett. Berkshire’s book value has grown by an average of 11.9% per year over the last decade, compared with a 6.6% average annual return for the S&P 500. In fact, the reason most Berkshire investors own the stock is specifically because they believe in Buffett’s ability to compound retained earnings. No one should want to own Berkshire because it owns shares of Coca-Cola. You should want to own Berkshire because Buffett has the wisdom to buy shares of Coca-Cola at the right time and the right price. He needs retained earnings to do that.
So, you want Berkshire to pay a dividend? Great, go sell a portion of last year’s capital gains. Most investors won’t, because they don’t want to sell an investment capable of compounding money year after year. Which is exactly why Berkshire doesn’t pay a dividend.
The article Buffett: You Want a Dividend? Go Make Your Own originally appeared on Fool.com and is written by Morgan Housel.
Morgan Housel owns shares of Berkshire. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway.
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