If you are considering investing in Warren Buffett Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)which is great because it is an amazing business. But if you’re looking for dividend income for stocks, I have some bad news for you: Berkshire Hathaway won’t pay dividends. However, this may change one of these days.
Generally speaking, companies tend to start paying regular dividends to shareholders when they have more cash than they use in their productivity. Companies often want to use their revenue to drive more growth – hiring more workers, buying more ads, building more factories, etc. They may also use cash to pay off debts, buy back stocks or reward employees, and other programs.
Many companies have more use Used for cash rather than actual cash, while other cash is more useful than for use. In the case of Berkshire, the company is a cash machine with its cash hoard recently hitting $325 billion. As my colleague Matt Frankel pointed out, Berkshire can buy some major companies in cash.
So, what happened to Berkshire and all the cash? Why don’t the company pay dividends? Well, Buffett does love dividends: Berkshire owns shares pay about $4.5 billion in dividends a year. But he has a long history of buying the company directly and is likely still looking for a complement to Berkshire. Using some of the company’s cash to dividends will limit his ability to do so.
That is, one day, he or his successors may think they have more cash than Berkshire’s. At that time, they may initiate dividends. Before that, shareholders can enjoy the appreciation of the stock price over time and when they need stock income, they can sell some stocks.
Buffett also rewards shareholders in a way – by buying back and essentially retiring Berkshire’s shares, giving each remaining share more value. Overall, Buffett prefers buybacks as long as the stock is undervalued and executed. Repurchases are rewarded to all shareholders without the need to deliver taxable cash payments.
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