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Warren Buffett's Two Rules For Dividend Investors

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August 21, 2012 – Comments (2) | RELATED TICKERS: KO , COP , INTC

We all like things presented in their simplest terms. Headlines like "Two simple steps to lose that unwanted weight" always grabs our attention, even if it is just to smile and say I wish it were true. I enjoy reading inspiring quotes. They often put life's issues in their simplest terms and in doses that are easy to swallow.

From an investing perspective, some of my favorite quotes come from Warren Buffett. Most are immediately intuitive, such as these:

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Price is what you pay. Value is what you get.
- Warren Buffett
However, a few have caused me to stop and ponder their true meaning, or meanings. None more so than the following quote:
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
- Warren Buffett
My first reaction to anything I read is to take it literally as written. In this case, rule number one would prevent you from ever buying a stock. By definition, you buy stocks at market price, plus a commission, so the moment you buy the stock you have lost money (the cost of the commission).

Obviously, Mr. Buffett didn't have such a literal view in mind when he made that statement. Like every investor, he has held stocks that have declined from where they were purchased. Instead, I think the true meaning of his statement are revealed in these quotes:

I. "I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

- Warren Buffett


The more complex an investment, the more likely it is to fail. There is something to be said for understanding what you are investing in and knowing what differentiates the company from its competitors. I believe the term Buffett uses is "moat".

II. "A public-opinion poll is no substitute for thought. "
- Warren Buffett


Selecting an investment is a long-term proposition. It shouldn't be a flippant decision based on what the talking heads saying on today's market report.

III. "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
- Warren Buffett


Focus on quality, it is the only thing that endures over time. It is very unlikely that you will lose money, over the long haul, with blue-chip quality stocks with a proven advantage.

Stocks In CommonWhen selecting stocks for my Dividend Growth Portfolio, I do my own research and reach my own conclusions as to the suitability of an investment for my portfolio. With that said, it was interesting to see how many stocks Buffett and I have in common. He buys them because they are quality companies and expects them to increase in value. I buy them because they are quality companies and I expect them to consistently increase their dividends.

Below is a list of companies we both hold based on Berkshire Hathaway Inc.'s form 13F for March 31, 2012 (June's was not out when I wrote this):

The Coca-Cola Company (KO) is the world's largest soft drink company, KO also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1877 and has increased its dividend payments for 45 consecutive years. Yield: 2.6%


ConocoPhillips Co. (COP) is one of the largest independent oil and gas exploration and production (E&P) companies in the world, COP spun off its downstream assets in May 2012. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 12 consecutive years.Yield: 4.6%

General Dynamics (GD) is the world's fifth largest military contractor and also one of the world's biggest makers of corporate jets. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 21 consecutive years.Yield: 3.2%

Intel Corporation (INTC) is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. The company has paid a cash dividend to shareholders every year since 1992 and has increased its dividend payments for 9 consecutive years.Yield: 3.4%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 50 consecutive years.Yield: 3.6%

The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 55 consecutive years.Yield: 3.4%

Wal-Mart Stores, Inc. (WMT) is the largest retailer in the world,Wal-Mart operates a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercenters. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 38 consecutive years.Yield: 2.1%

Quote To PonderFinally, I will leave you with one of my favorite Buffett quotes:

Chains of habit are too light to be felt until they are too heavy to be broken.
- Warren Buffett

Buying blue-chip dividend growth stocks is a habit that has served me well for many years.

Full Disclosure: Long KO, COP, GD, INTC, JNJ, PG, WMT. See a list of all my dividend growth holdings here.

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2 Comments – Post Your Own

#1) On August 21, 2012 at 2:58 PM, AlexisMachine (< 20) wrote:

your wrong about rule # 1 & 2.  The reason is simple if I buy a stock for $15.00 a share and it drops $5 to ten I  lost 33% but I now need my stock to gain 50% just to get back to even.  The greater the loss the steeper the curve so $100.00 stock that drops to $10 taking a 90% loss requires you to gain 1000% just to break even that is why rule 1 & 2 are so crucial to successful investing.  Buffett has also made a mint buying up family owned businesses that the patriarch has died triggering a massive estate tax which Warrenfavors but will never pay himself a penny of such taxes.  He does like to sit and shartpen his pencil while the IRS terrorizes the remaining family members involved in the business that say was worth 20 million will run 35-55% in death taxes that the IRS is not patient about getting paid and all the while Warren just gets to sharpen his pencil all the more to get a wonderful company at a "fair" price for Buffett who may also have sold such a family an insurance policy to pay for such an event when it happens which cost big bucks and fatten the Omaha Meal Worm's pockets still more.  Benjamin graham said "Price is what you pay & value is what you get". Not Warren who is largely thought to be his greatest progeny of his value investing philosophy.  Ben would not have been as enthused about Warren's use of crony capitalism to line his pockets nor his duplicitous stances on issues such as the death tax he loves so much that he has spent millions ensuring not a dime of his billions will pay any such taxes he has said they would just waste it.  Taxes for thee and not for me is a shameful part of Warren's legacy that he never gets called to account for and that is why he is the Omaha Meal Worm in my book.  Still he does offer some great info in his annual letters to share holders which are highly recomended reading to anyone intrested in what makes the greatest investor in world history just that.

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#2) On October 22, 2012 at 3:51 PM, AlexisMachine (< 20) wrote:

II am shocked, Shocked to not find the hoard's of Buffet Sycophant's gnashing thier teeth and rending thier clothing to rags after reading my exposure of Warren Buffett as the Meal Worm from Omaha and crony capitalist fraudster, hypocrite that he sadly far too often exposes himself to be just these precise things yet manages to continue to be worshipped as a God and not called to the carpet for his ridiculous support of the "death tax" & higher taxes for the rich like him but not like him as he has brilliantly structured his business holdings and wealth in such a way as to never pay a grape in capital gains taxes, be 85% exempt from dividend taxes and planning to pay his fair share of the 55%-90% death tax he so loves to sing the virtues of that he has acted with all due care to ensure the vast majority of his untaxed billions will avoid being taxed a dime of this death tax when he croaks.  As he said himself about his lucrative and exclusive to the billionaire elite rich little dodge of these taxes, "The government would just waste his wealth were he to pay those billions and billions of dollars in death taxes.  Taxes for thee and not for me is what should be the newest "buffett Rule" for this rotten old fool.

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