The Right Way To Play The Dividend Game

October 19, 2020

To be a seasoned investor, you need to be savvy about playing the dividend yield strategy. How smart exactly? Take a leaf from the Oracle of Omaha himself!

Let me illustrate this with the example of Coca-Cola:

Many experts consider this global beverage brand to be one of Warren Buffett’s all-time greatest investment. It also perfectly epitomises the wonderful extent of his investing wisdom and wit. Another food for thought: Coca-Cola is Berkshire Hathaway’s longest-tenured holding and continues to stand strong among the top 10, even till today.

This goes back to 1988, when Buffett bought more than $1 billion¹ of Coca-Cola shares. By all means it was a bold decision made in the aftermath of the infamous Black Monday stock market crash of 1987.

Since the end of 1988, Coca-Cola stock has climbed 1,750%². Based on the $1.64 per share Coca-Cola is paying out annually and Berkshire Hathaway’s average cost basis of $3.25, Buffett is doubling his initial investment sum every two years³.

Basically, it is safe to say that you shouldn’t base your investing strategy on the dividend yield of today’s stock price. Whilst yield is obviously important, it is critical to consider the overall health and staying power of the company. A company with deteriorating fundamentals will not be able to sustain its dividend payout in the long run. When investors realise that the company is no longer performing, the stock price will fall. This drop will inevitably eat into any initial dividend gains you might have received.

Leaving you with some wise words from the man himself:

“We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”

~ Warren Buffett