I have followed Warren Buffett since college. I have read a ton about his life and business success.
Warren Buffett is the greatest investor of all time. He has beaten the market over multiple decades and we can all learn a lot from his investing philosophy.
Luckily, we can gleam a lot about Warren’s investing secrets through interviews, his shareholder letters, and other sources.
So, how can we use Warren’s investing philosophy to be successful dividend investors?
Well, if you look at his portfolio, Warren Buffett actually owns a lot of classic dividend stocks (like Coca Cola)!
Here are 8 Warren Buffett secrets that can be directly applied to dividend investing.
1. Buy good quality businesses
Warren Buffett is all about buying quality businesses. In fact, he has been quoted to say something along the lines of: it is far better to buy a great business at a fair price than a good business at a great price.
Quality, Quality, Quality! Dividend investing is by definition long-term investing. Only high quality businesses can continue to pay (and increase) dividends over multiple decades.
If it’s not a high quality business, don’t own it. Simple as that!
2. Be patient
Patience is a virtue…especially in the investment world. Warren Buffett is known for being incredibly patient. In fact, legend has it that he waited decades to buy Dairy Queen (one of his favorite restaurants) at the right price.
Dividend investors need to be patient. You are not going to be able to retire off your dividend portfolio overnight. It takes a ton of time to be able to increase your dividend income build a well diversified portfolio that will last through retirement.
3. Long-term holding and horizon
These days, investors are known to be short-term holders of stocks. Investors rarely look more than a year or two out when buying a stock. Some even try to trade around quarters to get a short term pop.
Warren Buffett doesn’t do this and neither should you. Long-term investors have one HUGE advantage over short-term investors: TIME.
Time is the ally of all great, high quality businesses. In the short-term (1 – 3 years), a stock can under-perform for a variety of reasons. They might be going through a management change. The company might have botched a product launch.
However, if it is a high quality business, the market will recognize it in the long-run (5+ years).
A while ago, a friend described what long-term investors really are. Dividend investor and value investors engage in “time arbitrage.” We invest in stocks that are undervalued and might not look so hot now. We invest in stocks that are undervalued relative to their future value.
The only way to be a successful dividend investor is to have a long-term holding horizon. That’s how Warren Buffett accumulated his billion dollar empire!
Remember, we want to own businesses NOT rent them!
4. Businesses with long corporate histories
Warren Buffett owns some of the greatest American companies of all time. The list includes Coca Cola, IBM, and so many more.
What do those stocks all have in common? They have been in business for a LONG time!
Warren Buffett knows that businesses with a long and successful track record have a history of excellence. You don’t stay in business for 30+ years reporting crappy results!
Yes, I know…past performance is no guarantee of future out-performance. However, I’d rather own a stock that has a history of strong performance than a stock that is expected to “turn around.”
5. Keep a diversified portfolio
Keeping a diversified portfolio is incredibly important for your financial health. Put too much money into one stock and you might end up going under if one of your larger holdings collapses.
Warren Buffett keeps a relatively diversified portfolio. He owns industrials, utilities, retail companies, and consumer staples.
Diversification is incredibly important because it smoothes out the volatility in your portfolio. While one industry may be doing bad, another one might be able to offset it.
The classic example is airlines and oil companies.
If the price of oil collapses, oil companies are going to get hard. In contrast, airlines (whose largest expense is jet fuel), will benefit from lower input costs.
If you just owned oil companies, your portfolio would get hit hard. However, if you owned both, your portfolio would partially offset itself!
6. Keep things simple
Warren Buffett keeps things simple. His investment strategy is simple: buy great companies at fair prices and hold them forever.
The dividend investing strategy is simple too: buy stocks that can pay and increase dividend over multiple decades.
The harder an investment strategy is to understand, the higher the execution risk. Dividend investing is one of the easiest investing strategies to follow.
Keep it simple and you’ll succeed!
7. Invest in what you know
One of Warren Buffett’s most famous sayings is stay within your circle of competence. What does that mean?
He means you should only invest in companies that you know and understand. That’s why Buffett has largely avoided companies in the technology and software industries.
Personally, I avoid stocks in the biotech industry because they are too volatile and I really don’t understand what they do.
NEVER invest in a stock or company if you don’t know what is going on. Sure, you might miss out on some returns, but more often than not you’ll save yourself from big losses too.