Berkshire Hathaway is known for not paying dividends to its shareholders, which can be puzzling for some investors. Instead of receiving dividends, investors primarily benefit from capital appreciation. Here’s how that works:
Capital Appreciation
Investors buy shares of Berkshire Hathaway with the expectation that the value of those shares will increase over time. The company’s strategy of reinvesting profits into its businesses and acquisitions generally leads to long-term growth in the share price. As the stock appreciates, investors can realize their gains by selling their shares at a higher price than they initially paid.
Value of Owned Businesses
Berkshire Hathaway owns a diverse range of subsidiary companies across various industries, including insurance, utilities, manufacturing, and even investments in publicly traded companies like Apple and Coca-Cola. The performance and profitability of these businesses contribute to the overall value of Berkshire Hathaway, positively affecting its stock price. This, in turn, benefits shareholders as the value of their shares increases.
Investment Portfolio
Berkshire also holds significant investments in publicly traded companies, such as Apple and Coca-Cola, which contribute to the overall value of the company. The appreciation in these investments indirectly benefits shareholders, as the overall value of Berkshire Hathaway increases.
Long-Term Focus
Warren Buffett, the CEO, has emphasized a long-term investment philosophy. Many investors in Berkshire Hathaway are aligned with this approach, seeking to benefit from the company's growth over time rather than immediate cash returns. Investing in Berkshire Hathaway is, in a way, similar to selling a small portion of the company and earning the difference in value as a capital gain.
Selling Shares for Cash
If an investor needs cash, they can sell some of their shares. Suppose an investor owns 30 shares and wants some cash. They can sell one share, earning a 'dividend' equivalent of 3.3 times the share price. This is similar to a dividend-paying company that liquidates a small portion of the company each quarter and sends the cash, whether one wants it or not.
It is important to note that while dividends are fully taxable, selling a share or two is only partially taxable. For example, if a share sold for $3000 and the investor paid $2000 for it, only the $1000 gain is taxable.
In summary, Berkshire Hathaway investors primarily make money through capital appreciation, relying on the company's growth and successful investment strategy to increase the value of their shares. This approach aligns well with long-term investment philosophies and offers a more tax-efficient way to realize gains compared to immediate dividend payments.
Hope this helps!