Wednesday, November 16, 2016

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 June 30, 2016 (September's was not out when I wrote this):

Apple Inc. (AAPL) is a prominent provider of hardware including iPhone smartphones, iPad tablets, Mac computers, wearables and iPod digital media players. The company has paid a cash dividend to shareholders every year since 2012 and has increased its dividend payments for 5 consecutive years. Yield: 2.1%

The Coca-Cola Company (KO) is the world's largest soft drink company, and also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 54 consecutive years. Yield: 3.4%

IBM's (IBM) global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 21 consecutive years. Yield: 3.5%

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 54 consecutive years. Yield: 2.7%

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 59 consecutive years. Yield: 3.2%

Verizon Communications Inc. (VZ) is the largest U.S. wireless carrier, Verizon also offers wireline and broadband services primarily in the northeastern U.S. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 12 consecutive years. Yield: 5.0%

Wal-Mart Stores, Inc. (WMT) is the largest retailer in the world, operating 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 42 consecutive years. Yield: 2.8%

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 AAPL, KO, IBM, JNJ, PG, VZ, WMT. See a list of all my Dividend Growth Portfolio holdings here.

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(Photo Credit)

Tags: AAPL, KO, IBM, JNJ, PG, VZ, WMT,

1 comment:

  1. I am glad to see that I own a few of these with you guys. I totally agree with you about Buffett having some very insightful quotes. He can share a lot of wisedom with very few words. Thanks for sharing.

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