Last but not least, book values and stock prices do not always have a one to one relationship. For example, during the 1998 – 2000 period, Buffett was often cited as being out of touch with reality since he didn’t invest in tech stocks. This was the period when red hot technology stocks dominated investor interests, and Buffett was often ridiculed for his avoidance of the sector.
As a result, after Berkshire’s stock reached a high in June 1998 of $84,000, it fell all the way to $43,000 in February 2000. The stock didn’t exceed its high until November 2003. Investors who simply held on to the stock, did not realize any return on investment for five long and difficult years, despite the fact that book value per share increased during the same period. In contrast, investors in dividend paying stocks have received positive reinforcement every three months, whenever the dividend checks were deposited in their brokerage accounts. Getting paid to hold shares with improving fundamentals is much easier done than holding non-dividend stocks during turbulent market conditions, hoping that the market would realize the investment’s true potential.
In summary, an investment in Berkshire Hathaway exposes our investor to the whims of Mr. Market. An investment in Dividend Paying Stocks still makes the investor partially vulnerable to the whims of Mr. Market when it comes to stock prices.
However, dividends provide a direct link between the company’s operating performance and investors’ return on investment, which are not dependent on the whims of Mr. Market. To paraphrase some of Mr. Buffett’s words, even if they closed the stock market for five years, dividend investors would keep getting their dividend checks on a regular basis. And these checks would be bigger in year five than in year one.
Full Disclosure: Long KO, MCD, WMT and BRK.B