Danielle Town and Phil Town’s Invested book November chapter reveals insights about dividends, buybacks, and when to sell stocks that we should keep in mind along our investing journey if we want to invest like Warren Buffett.
-Intro to Invested Book November
-Danielle Town Bought Whole Foods
-When Do You Sell Stocks? Ideally Never
-Reasons To Sell Stocks
-Dividends: Pros and Cons
-Stock Buybacks: Pros and Cons
-Reduce Basis with Dividends and Buybacks
Imagine we have what Warren Buffett called a hole punch card for buying up to 20 companies throughout our lifetime. We would be very careful about selling any of these companies that we put a lot of effort to select.
Warren Buffett’s favorite holding period of stocks is forever, so unless the story of the company changes, ideally we should never sell, per Phil Town.
We can think of dividends as a return of our investment in a stock, and to think about how many years it will take to get our investment basis back in dividends. Using Apple as an example if its stock is trading at $148 per share, and its dividends are 88 cents per year, then it will take 168 years to get our money back through dividends.
Unlike dividends, stock buybacks avoid the issue of double taxation (dividends are taxed at the corporate and individual level). But stock buybacks or share repurchases are only good if it’s done when companies’ stock are bought back at a price that is below the intrinsic value of the company.
Berkshire Hathaway and Apple have done share repurchases that have reduced the amount of shares outstanding. Doing stock buybacks tends to boost the earnings per share and return on equity because there are less shares outstanding.
As an example, Berkshire originally owned 5.2% of Apple, and through Apple doing buybacks, Berkshire’s position in Apple actually increased to 5.4% according to a 2021 letter from Warren Buffett.
We should consider dividends and stock buybacks as a means to reduce our cost basis in the stocks we have invested in, but not as a reason as to whether to buy the stocks or not. It’s more important to consider the company’s fundamentals to decide if we should invest or not.
I’ve made mistakes in the past of looking for stocks that had higher levels of dividends, but if the company is giving out too much dividends, that might not be healthy for company long term.
Also, if I get dividends then I’m likely taxed on them, and in order for me to generate extra returns, I have to way over-perform rather than if the company just held onto its cash and was able to productively grow the company with it instead of giving the cash to me as a retail investor.
Phil Town said we don’t have to keep tabs on companies all the time, we can devote about 6 hours per company per year in keeping up with their annual reports (10-K) and quarterly reports (10-Q) as long as the company’s story hasn’t changed too much.
This concept is attributed to Charlie Munger in which investing can be simple, but that doesn’t it’s easy. But easy comes with gaining mastery, and mastery comes from practicing investing.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram: michellemarki