Should I Reinvest Dividends? WWWD?

July 11, 2007 by Joe Ponzio

Conventional wisdom on Wall Street says that you should definitely reinvest any dividends you get. Then again, look how well Wall Street’s conventional wisdom has done for you over the years.

If you are blindly speculating in stocks or putting money into Wall Street’s mutual funds, reinvesting your dividends may very well be the only thing that saves your portfolio. But, if you are buying wonderful businesses at a discount, reinvesting suddenly becomes silly. After all, Warren Buffett doesn’t do it. He’s pretty smart, right?

A Quick Look At His Holdings

Berkshire Hathaway owns or controls 200 million shares of Coca-Cola (ticker: KO). Its position is the same as it was in 1999. With KO’s dividend at $1.36 a share, Buffett is collecting $272 million a year in dividends. But…he’s not reinvesting them.

Wall Street Says…

If Buffett were reinvesting his dividends, he’d increase his position in KO by another 2% or so each year. Following that advice since his initial purchase in 1988, Buffett’s stake in Coca-Cola would be much larger today.

That’s Not What He’s About

Buffett isn’t interested in owning large stakes in businesses-he is interested in creating wealth for his shareholders. Owning large pieces of businesses comes with the job.

Considering that Buffett’s primary goal is growth, he would silly to reinvest his dividends (and he doesn’t). Though a gambler can get short-term growth anywhere, to get growth as an investor you have to buy businesses when they are on sale. When they are not on sale, you have to find value elsewhere-even if that means sitting in cash.

Once Coca-Cola began trading at a price that was no longer “fair” to Mr. Buffett, he stopped buying it. Buying Coca-Cola at a discount was brilliant. Investing that $272 million in dividends in a company that is overpriced is, well, the opposite. Why overpay for value and guarantee a poor return when you can simply be patient until you find the next Coca-Cola?

What Are You About?

When it comes to your money, are you one who buys businesses at a discount and refuses to overpay-even in “dividend-size” increments? Or, do you follow Wall Street into the market and secretly hope that your reinvested dividends make up for Wall Street’s mistakes?

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