Here is something that you may not realize about Warren Buffett: Counting only his take-home pay, the Oracle of Omaha is a pauper compared to his peers.
With a yearly salary of just $100K from Berkshire-Hathaway, the grandfatherly Buffett just barely finds himself among the top 30% of earners — a mere pittance for one of the world's richest individuals.
But as we all know, there is more to this story than meets the eye.
After all, Warren is not exactly wondering where his next meal is coming from...
The difference, in this case, is in the dividends.
Dividend Stock Strategies
You see, aside from the paycheck he received from his "day job," Warren earned an estimated $62,855,038 in income last year — mostly from the dividends spun off from his own personal holdings.
Those dividend money machines accounted for practically all of his income, keeping him flush with cheeseburgers and business jets.
And with the yields on the benchmark 10-year Treasury note hovering between a 2% and a 2.5% yield, Buffett's dividend portfolio will likely outperform in 2015, adding to his massive fortune.
True to form, he buys them, holds them, and watches them grow.
Simple, yet effective.
But that's not the only advantage to be had by building a portfolio like Warren's...
The other benefits of a divided-based portfolio include:
Safety – If preserving your money is as important to you as it is to Buffett, dividend investments are preferable because of their low risk.
Diversification – If the balance of your portfolio tilts towards growth, dividend investments can help you diversify acting as a buffer against unpredictable market swings.
Access – Dividend-paying stocks offer investors ready access to their income streams, unlike similar investments in 401(k)s and IRAs, which are retirement-based and carry penalties for early withdraws.
Don't believe for a second that income investments are boring and are only suited for the gray-haired crowd.
The larger truth is that dividend-paying stocks should be a part of every well-balanced portfolio — young, old, or somewhere in between.
Even in bear markets, dividend-paying stocks typically do well, especially if those companies have a strong history of increasing the dividend payout. That's because investors win two ways when a company increases its dividend: first, the yield on your initial investment goes up with the dividend; second (and even better), the dividend increase often propels the share price higher.
That's an unbeatable combination in today's tough markets.
And it's the reason investors are so eager right now to gobble up companies with solid dividend yields.
So, What is Dividend Yield?
In short, a dividend yield is a cash payout that you receive for simply being a shareholder, sort of like receiving a bonus based on a company's earnings.
Moreover, these "bonuses" also offer lower tax rates than similar investments in savings, CDs, or money market accounts.
Thanks to a change in the tax law, dividends are now taxed at only 15%. That's considerably better than the 35%+ taxation levied against ordinary income.
Dividend yield is simply your rate of return from the dividend payouts, exclusive of any stock price appreciation. It's calculated by dividing the dividends you receive over a year's time by the price you paid for the stock.
I'll give you an example: Your dividend yield is 5% if you paid $20 per share, and you receive $1 per share in dividends ($1/$20) over the 11 months following your purchase.
Dividend yield, however, is not a fixed number. It changes along with the share price.
For instance, say someone else buys the same stock a week later when the share price had moved up to $25. Instead of 5%, their dividend yield would only be 4% ($1/$25).
However, as Warren Buffett would surely tell you, picking successful dividend-paying stocks is not as simple as buying the stocks with the highest yields. In fact, the stocks with the highest yields often trip up investors the most.
So if you really want to invest like Warren Buffett, you can spend your time pouring over his annual letter to shareholders... or you can create a dividend money-machine of your own by following the famed investor's own personal holdings.
Warren Buffett's Personal Portfolio
Thanks to the public nature of mandatory reports on Berkshire Hathaway holdings, we can comb through all of Warren Buffett's positions.
Per the SEC, here is a look at the top ten dividend stocks Warren Buffet owns (from highest yielding):
- Verizon Communications, Inc. (NYSE:VZ) 11.0 million shares - 4.32% yield
- ConocoPhillips (NYSE: COP) 11.1 million shares - 3.55% yield
- Gerneral Motors Company (NYSE:GM) 30.0 million shares - 3.52% yield
- Proctor and Gamble (NYSE:PG) 52.8 million shares - 3.21% yield
- The Coca-Cola Co. (NYSE: KO) 400.0 million shares - 2.99% yield
- Wells Fargo (NYSE: WFC) 463.5 million shares - 2.86% yield
- Exxon Mobil Corporation (NYSE:XOM) 41.1 million shares - 2.74% yield
- Walmart (NYSE:WMT) 58.1 million shares - 2.49% yield
- Phillips 66 (NYSE:PSX) 9.7 million shares - 2.44% yield
- International Business Machines Corp. (NYSE:IBM) 68.4 million shares - 2.36% yield
Among them, they pay an average dividend yield of 3.05%. Four of the companies on our list are in his top five positions by size. This plan allows Buffett to "get by" on the $1,923.08 found in his weekly paycheck.
That, my friends, is how the other half lives.
The good news is that by building a five-stock dividend portfolio of your own, you can jump on the road to wealth right there with 'em.
Outsider Club will bring you the best dividend stocks each and every week to help you invest right alongside Uncle Warren...
Thanks for subscribing to the Outsider Club. We'll continue to find ways to boost your portfolio with flexible and safe investments that will help you break free of the traditional trading advantages, traps, and pitfalls financial institutions use to siphon off your wealth...
The Outsider Club Research Team