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Milk That Cow Every Quarter:

Buffett Milkman

I don’t know if I’ve told readers this before….(ok maybe almost a hundred times)….but I LOVE DIVIDENDS!

In a market such as this, where volatility rules the day, dividends are the solstice in my investing activities that reminds me why I enjoy being paid to wait. Even if the market drops 20%, I’m not nearly as exposed to losses as indexed investors when my portfolio yields a hefty 4% of tax efficient dividends. Not only that but my tax-efficient cashflow is growing anywhere between 5-8% per year at a minimum and in depressed markets I’m simply adding to already undervalued shares with the prospects of a stress-free retirement with unlimited possibilities to keep my occupied.

Warren Buffett knows the value of cashflow, both personal and corporate. In the news yesterday Goldman Sachs announced that Berkshire Hathaway, Buffett’s investing vehicle, will purchase $5B worth of perpetual preferred shares with a 10% dividend being paid in return for exclusive use of this capital injection. Not only does Berkshire get a dividend nearly double that of Canadian bank issued perpetuals, but the holding company also receives warrants to purchase $5B of common stock at $115 during the next five years.

This effectively sets a floor price on the common stock of GS and gives them a much needed credibility boost in a market of much uncertainty. Buffett has already established a comfortable margin of safety in his investment even if the warrants are never exercised. With extensive experience in unwinding derivative positions in General Re Securities back in 2002, Buffett is likely to begin exerting significant pressure on Goldman management behind closed doors right away to limit its exposure to “toxic waste.” If Goldman balks at the move, the market will likely see Buffett exercising the warrants on the common in a move to send a clear message to both the market & company that he means business.

Buffett doesn’t invest with any intention of losing money and he’s given Goldman Sachs a rare opportunity to clean up their act with a vote of confidence from an investor revered as the best in the world. He buys for the long-term and has learned from past mistakes to take opportunities he can create in his favour to better position Berkshire for the future.

The Oracle’s been busy buying in recent days & weeks and I find comfort in this behaviour as I myself have seen these market troubles as opportunities to buy quality companies at much cheaper valuations that I would have otherwise expected.

Scott asked me earlier this morning, “Who better to navigate this minefield than Warren and Charlie?” and an investor has to wonder if we’re better off simply buying shares in BRK.B at this time of market uncertainty then attempting to navigate the cluttered minefield of exposed companies on our own.

As a keen student of Buffett and other value investors I’ve learnt a great deal that starts with the basic foundation of how to be successful when investing. I follow my Value Rules, buy quality companies that pay me a dividend and when I have an adequate margin of safety I buy some more. I might not always get the cheapest price than other investors, but over the long-term I believe I’m much better off buying a company that pays me every quarter to invest in their business. Over time I can reinvest those dividends into more shares of the same company or others and accelerate the compounding nature of my investments for the long-term.

Here’s one thought for readers: Buffett’s the milkman and he never forgets to deliver.

(Disclosure: I hold shares in GS)

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{ 5 comments… add one }
  • Dividend Growth Investor September 24, 2008, 10:40 am

    I love dividends. Getting more money from your stocks every month/quarter/year to put to work into the market is one of my favorite moments.
    You’ve got an interesting portfolio out there. I hope you’re not overexposed to a single sector ( financials)

  • Nurse B, 911 September 24, 2008, 11:42 am

    I know what you mean about dividends DGI; they're a love affair of mine. I still remember the first dividend I ever got and the incredible feeling of having something tangible for my stake in the business.

    My financial exposure in DivG is currently 35% and that includes commons & preferreds, banks & insurers. Since I only started the portfolio in May of 2007 the financial composition is more reflective of relative value in the past 16 months than a targeted allocation. I would feel much more confident if my financial exposure was 25-30%, but since I still have a few more names to add (CNR & ENB are top targets) the relative weighting of financials will drop accordingly. I have been busy adding utilites & telecom of late.

    I'll be posting next month a sneak peek into DivG so please look forward to that post for more insights into what I have.

  • augustabound September 24, 2008, 4:40 pm

    Hello, my name is Paul and I’m a dividend-a-holic also.

    “Who better to navigate this minefield than Warren and Charlie?” and an investor has to wonder if we’re better off simply buying shares in BRK.B at this time of market uncertainty then attempting to navigate the cluttered minefield of exposed companies on our own.”

    Not to sound like a market timer, but it would have been nice to have bought the baby B’s a month ago at $3800.

  • Nurse B, 911 September 24, 2008, 4:46 pm

    Welcome Paul and congratulations on taking the first step in manageing your addiction: admission! 🙂

    Yeah, it would have been nice in retrospect to look at BRK.B a few months ago when it was much cheaper, but who knows what happens. Historically its shown to be a great investment and regardless of who takes over the reins in future years I’m sure it’ll still perform wonderfully.

  • MG (moneygardener) September 24, 2008, 7:45 pm

    Hi, my name is MG and I’m also addicted to dividends….

    Dividends are prevading every corner of my life. I see them in my dreams, I use them to pay for home heating appliances, I even think about them in the shower and while running…I’m glad to hear that there are others out there like me.

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