Berkshire Hathaway, led by legendary investor Warren Buffett, has a long record of remarkable growth over the past decades. Another thing about the business that might stand out to investors is the fact that shareholders have never gotten any dividends in the entire history of the company. But why doesn’t Berkshire Hathaway pay any dividends?
Simply put, Warren Buffett, who is CEO and chairman of Berkshire Hathaway doesn’t see any good reasons to pay dividends to shareholders, as he knows that the cash would be of better use both for the business and for its shareholders when it is fully reinvested back into the company.
Reinvesting profits is essential for any company to improve efficiency, expand business operations, and develop advantages that separate the business from competitors. Furthermore, earnings can also be used to make new acquisitions or buy back own stock if it’s appropriate to do so.
But isn’t the purpose of investing in a company to collect profits out of the business in the first place?
Why Dividends Aren’t a Necessity
Companies aren’t necessarily required to have and maintain a dividend policy. This is because dividends are just an alternative way of returning profits back to investors but not the only way.
- In general, there are two ways how you as an investor can make money from being shareholder within a company: The first way is capital gains – simply the profit that you make when selling your investment at a higher price point than you initially bought. The second way is paying dividends – when a company decides to pay a part of its earnings to shareholders.
Arguably, the primary objective of a company should ultimately be to increase shareholder value. The outcome growing shareholder value would result in an increasing stock price over time.
But when a company pays a certain amount of its earnings as a dividend to its shareholders, it essentially gives away the amount of capital that could have been reinvested into the business in the first place.
In other words, every dollar that is being paid as a dividend is also a dollar that could have been used to grow the business in the first place. Therefore, some companies may choose to rather reinvest all potential capital back into the business, as that may be the better option.
Generally speaking, many investors prefer to receive a regular dividend from the companies that they are invested in. Who wouldn’t say no to an additional stream of income from their investment right?
This is why most dividend-paying companies usually try to remain on a consistent track of steadily growing dividends in order to keep existing shareholders happy and attract additional people to invest in the company.
But sometimes this may not be the case. A business might decide to cut their dividends at any point in time, maybe due to financial hardships within the company or other negative related causes.
Other businesses might decide to not pay any dividends in the first place, as the company’s management is confident that the end result for both the business and its shareholders would be better if not just a part, but all of the earnings would be reinvested back into to business. The latter applies to Berkshire Hathaway.
Buffett Prefers Reinvesting Instead of Dividends
Warren Buffett believes that Berkshire shouldn’t pay any dividends as long as he is confident that all the profits of the business can be efficiently reinvested back into the company or be used for other effective purposes.
However, this doesn’t mean that Buffett doesn’t like dividends in general. In fact, he loves collecting dividends from the companies that Berkshire holds since he knows that not every company would be better off if not paying any dividends. Different types of businesses will follow different approaches.
Not paying dividends is the way that Berkshire Hathaway chooses to follow, which might be different than many other companies. Of course, Buffett’s assumptions about the use of Berkshire’s capital might change at any time, which then could lead Berkshire to pay dividends at some point in the future.
Nevertheless, Berkshire Hathaway is a great example of a company that has provided exceptional growth for investors over the past decades.
Certainly, the growth of the business wouldn’t be so high if Berkshire would have decided to pay a part of its earnings as dividends on a regular basis.
Let’s say that you’ve invested in Berkshire Hathaway, and the business suddenly decided to pay dividends to its shareholders. What would you do with your received amount of dividends? If we assume that you wanted to reinvest those dividends back into your investments, which approach would you take?
Would you use the money to acquire additional shares of Berkshire, or would you invest in other businesses instead? How much of a return do you think would you accomplish with your own investment decisions?
Do you think that you could achieve a higher return on your chosen investments than Warren Buffett?
Well, first you would have to pay taxes on the dividends, which would already limit your returns in the first place.
Thus chances are that the money would be of better use within the business where it’s managed by very experienced people including one of the best investors of all time, to ultimately increase shareholder value in the long run.
And the results can speak for themselves: If you invested $1000 in Berkshire Hathaway in 1975, you would be a multi-millionaire by today.