Here’s something you may not know about Warren Buffett: Counting only his take-home pay, the Oracle of Omaha is a pauper compared with his peers.
With a yearly salary of only $100,000 from Berkshire Hathaway, Buffett barely finds himself among the top 30% of earners — a mere pittance for one of the world's richest individuals.
But as we all know, there is more to this story than meets the eye. After all, Buffett is not exactly wondering where his next meal is coming from... although it’s likely coming from McDonald's because that's his favorite, not because that's all he can afford.
The difference, in this case, is in the dividends.
Dividend Stock Strategies
You see, aside from the paycheck he receives from his "day job," Buffett earned an estimated $7,529 PER MINUTE from the dividends spun off from his own personal holdings.
Those dividend money machines accounted for 96.28% of his estimated earnings per year, keeping him flush with cheeseburgers and business jets.
With the yields on the 10-year Treasury note hovering at 1.63%, along with the stock market struggling to find solid footing, Buffett's dividend portfolio will likely outperform in 2022, adding to his massive fortune.
True to form, he buys them, holds them, and watches them grow.
Simple, but effective.
And that's not the only advantage of building a portfolio like Uncle Warren's...
The other benefits of a dividend-based portfolio include:
- Safety — If preserving your money is as important to you as it is to Buffett, dividend investments are preferable because of their low risk.
- Diversification — If the balance of your portfolio tilts toward growth, dividend investments can help you diversify, acting as a buffer against unpredictable market swings.
- Access — Dividend-paying stocks offer investors ready access to their income streams, unlike similar investments in 401(k)s and IRAs, which are retirement-based and carry penalties for early withdrawal.
So don't believe for a second that income investments are boring and only suited for the gray-haired crowd. The larger truth is that dividend-paying stocks should be a part of every well-balanced portfolio, whether you’re young, old, or somewhere in between.
Here's why: Even in bear markets, dividend-paying stocks typically do well, especially if those companies have a strong history of increasing the dividend payout.
That's because investors win two ways when a company increases its dividend. First, the yield on your initial investment goes up with the dividend. Second, and even better, the dividend increase often propels the share price higher.
That's an unbeatable combination in today's tough markets. And it's the reason investors are so eager to gobble up companies with solid dividend yields.
So What Is Dividend Yield?
In short, a dividend yield is a cash payout you receive for simply being a shareholder — sort of like receiving a bonus based on a company's earnings.
Moreover, these "bonuses" also offer lower tax rates than similar investments, savings accounts, CDs, or money market accounts. Thanks to a change in the tax law, dividends are now only taxed at 15% for individuals who earn less than $441,550. That's considerably better than the 20%–35% taxation on ordinary income.
Dividend yield is simply your rate of return from the dividend payouts, independent of any stock price appreciation. It's calculated by dividing the dividends you receive over a year's time by the price you paid for the stock.
I'll give you an example: Your dividend yield is 5% if you paid $20 per share, and you receive $1 per share in dividends ($1/$20) over the 12 months following your purchase.
Dividend yield, however, is not a fixed number. It changes along with the share price. For instance, say someone else buys the same stock a week later when the share price has moved up to $25. Instead of 5%, their dividend yield would only be 4% ($1/$25).
However, as Warren Buffett would surely tell you, picking successful dividend-paying stocks is not as simple as buying the stocks with the highest yields. In fact, the stocks with the highest yields often trip up investors the most.
So if you really want to invest like Warren Buffett, you can spend your time poring over his annual letter to shareholders, or you can create a dividend money machine of your own by following the famed investor's own personal holdings.
Warren Buffett's Personal Portfolio
The latest filings from his corporate portfolio showed that he had multimillion-dollar stakes in 47 companies as of the end of last year.
Per the SEC, they included investments in:
- Wells Fargo (NYSE: WFC).............................. 136,340,848 shares
- Johnson & Johnson (NYSE: JNJ)...................... 327,100 shares
- Procter & Gamble (NYSE: PG).......................... 315,400 shares
- Bank of America (NYSE: BAC).................................. 1,032,852,006 shares
- Apple Inc. (NASDAQ: AAPL).................................... 1,003,466,264 shares
- U.S. Bancorp (NYSE: USB)................................... 149,590,275 shares
- Coca-Cola (NYSE: KO).............................. 400,000,000 shares
- United Parcel Service (NYSE: UPS)..................... 59,400 shares
- General Motors (NYSE: GM) ..................................... 74,681,000 shares
- American Express Co. (NYSE: AXP)................................... 151,610,700 shares
These companies paid an average dividend yield of 1.6% in 2020, with Buffett concentrating 78% of his investments in the top five stocks. This plan allows Buffett to "get by" on his $1,923.08 weekly paycheck.
That, my friends, is how the other half lives.
The good news is that by building a five-stock dividend portfolio of your own, you can jump on the road to wealth right there with 'em.