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Tuesday, August 14, 2012

Warren Buffett's Two Investing Rules For Dividend Investors

We all like things presented in their simplest terms. Headlines like "Two simple steps to lose that unwanted weight" always grabs our attention, even if it is just to smile and say I wish it were true. I enjoy reading inspiring quotes. They often put life's issues in their simplest terms and in doses that are easy to swallow.


From an investing perspective, some of my favorite quotes come from Warren Buffett. Most are immediately intuitive, such as these:
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Price is what you pay. Value is what you get.
- Warren Buffett

However, a few have caused me to stop and ponder their true meaning, or meanings. None more so than the following quote:
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
- Warren Buffett

My first reaction to anything I read is to take it literally as written. In this case, rule number one would prevent you from ever buying a stock. By definition, you buy stocks at market price, plus a commission, so the moment you buy the stock you have lost money (the cost of the commission).

Obviously, Mr. Buffett didn't have such a literal view in mind when he made that statement. Like every investor, he has held stocks that have declined from where they were purchased. Instead, I think the true meaning of his statement are revealed in these quotes:

I. "I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

- Warren Buffett


The more complex an investment, the more likely it is to fail. There is something to be said for understanding what you are investing in and knowing what differentiates the company from its competitors. I believe the term Buffett uses is "moat".

II. "A public-opinion poll is no substitute for thought. "
- Warren Buffett


Selecting an investment is a long-term proposition. It shouldn't be a flippant decision based on what the talking heads saying on today's market report.

III. "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
- Warren Buffett


Focus on quality, it is the only thing that endures over time. It is very unlikely that you will lose money, over the long haul, with blue-chip quality stocks with a proven advantage.

Stocks In Common

When selecting stocks for my Dividend Growth Portfolio, I do my own research and reach my own conclusions as to the suitability of an investment for my portfolio. With that said, it was interesting to see how many stocks Buffett and I have in common. He buys them because they are quality companies and expects them to increase in value. I buy them because they are quality companies and I expect them to consistently increase their dividends.

Below is a list of companies we both hold based on Berkshire Hathaway Inc.'s form 13F for March 31, 2012 (June's was not out when I wrote this):

The Coca-Cola Company (KO) is the world's largest soft drink company, KO also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1877 and has increased its dividend payments for 45 consecutive years. Yield: 2.6%


ConocoPhillips Co. (COP) is one of the largest independent oil and gas exploration and production (E&P) companies in the world, COP spun off its downstream assets in May 2012. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 12 consecutive years.Yield: 4.6%

General Dynamics (GD) is the world's fifth largest military contractor and also one of the world's biggest makers of corporate jets. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 21 consecutive years.Yield: 3.2%

Intel Corporation (INTC) is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. The company has paid a cash dividend to shareholders every year since 1992 and has increased its dividend payments for 9 consecutive years.Yield: 3.4%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 50 consecutive years.Yield: 3.6%

The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 55 consecutive years.Yield: 3.4%

Wal-Mart Stores, Inc. (WMT) is the largest retailer in the world,Wal-Mart operates a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercenters. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 38 consecutive years.Yield: 2.1%

Quote To Ponder

Finally, I will leave you with one of my favorite Buffett quotes:

Chains of habit are too light to be felt until they are too heavy to be broken.
- Warren Buffett

Buying blue-chip dividend growth stocks is a habit that has served me well for many years.

Full Disclosure: Long KO, COP, GD, INTC, JNJ, PG, WMT. See a list of all my dividend growth holdings here.

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(Photo Credit)
Tags: [KO] [COP] [GD] [INTC] [JNJ] [PG] [WMT]

2 comments:

  1. Uncle Warren dumps gobs of JNJ and PG, also apparently dumps a small holding in Intel.

    I don't know whether his actions confirm or contradict this blog posting. It had why too many Warren aphorisms in it for my taste.

    Frankly, I don't think Buffet is in stocks for the divis.

    Bboy

    long (umm, still long despite Warren): JNJ, PG and Intel

    ReplyDelete
  2. Good stuff. Buffett and Munger seem to leave a lot gems in interviews. I'm sure there's a lot of behind-the-scenes research going into their investments but their wisdom provides good guiding principles.

    Regards,
    Dear Dividend

    ReplyDelete

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