Warren Buffett, the top honcho at Berkshire Hathaway, possesses one of the investment world’s brilliant minds. His $10,000 meagre seed capital in the 1950s grew to a massive fortune. His net worth in 2021 is US$87.5 billion and he currently ranks as the seventh-richest man on Earth. Meanwhile, his conglomerate’s gain in more than 55 years is 2.7 million percent.
The legendary investor’s life is an open book. People take his nuggets of wisdom to heart in the hope they will achieve the same success. Buffett is also responsible for creating value for Berkshire shareholders to the tune of $400 billion. Since 1965, his investment firm’s stock delivered a 20.3% annual average return.
Among the strategies that give Buffett the most significant long-term advantage is dividend investing. He has an affinity for established dividend stocks. You can say it was the key to accumulating wealth through the years.
The GOAT of investing is a value investor, first and foremost. He possesses the knack to identify companies with competitive advantages. Likewise, he has patience and lets his investments roll and grow over time — even decades. If you analyze Berkshire Hathaway’s stock portfolio, 31 of the total 49, or 63%, pay dividends.
This year, analysts expect Buffett’s conglomerate to collect roughly US$3.8 billion in dividends from the income stocks in its portfolio basket. The bulk of the windfall will come from six companies led by dividend kingpin Apple. Bank of America, Coca-Cola, Kraft-Heinz, American Express, and U.S. Bancorp round up the list.
Build wealth over time
Incidentally, Berkshire Hathaway isn’t a dividend payer. Buffett would instead fully reinvest the cash than pay dividends to shareholders. By reinvesting profits, Berkshire can improve efficiency, expand business operations, and develop advantages that separate the firm from competitors.
However, regular investors can adopt Buffett’s long-term investment strategy to build wealth from dividend stocks. Furthermore, the earning potential is two-pronged, because the stock price could appreciate too. If you’re saving to secure your financial future or need a recurring income stream in retirement, there are dividend stocks you can buy and hold forever.
The most investor-friendly dividend stock in the TSX is none other than Bank of Montreal (TSX:BMO)(NYSE:BMO). No company can eclipse the bank stock’s outstanding dividend track record. This $48.63 billion bank is the first company ever to pay dividends. It has been sharing profits with shareholders since 1829. The record would be two centuries by 2029.
Currently, the share price is $75.45, while the dividend offer is 4.26%. Assuming you invest $200,000 today, the quarterly income stream is $2,130. If you don’t touch the principal and keep reinvesting the dividends, your money will compound to $460.664.14 in 20 years. Sustainability isn’t a problem, because BMO maintains the payout ratio at less than 60%.
Over the last five years, BMO increased its dividend five times (year over year), and the average annual increase is 5.39%. Future dividend growth usually depends on earnings growth and payout ratios. Despite the country’s moderate economic recovery in 2021, analysts forecast a 13.09% earnings growth versus last year.
Warren Buffett knows his game and will not gamble on mediocre companies. He’s looking for an economic moat and consistent cash flows. BMO has both, along with its ability to weather economic meltdowns like the 2008 financial crisis and the 2020 COVID-19 pandemic.
Fool contributor Christopher Liew has no position in any of the stocks mentioned. David Gardner owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares) and recommends the following options: short March 2021 $225 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).