The Impact of Dividends on Berkshire Stock
Most great companies reward their owners with cash payments called dividends. But for over 50 years, Warren Buffett’s Berkshire Hathaway hasn’t paid a single one. So how did a company that keeps all its profits make its investors so astonishingly rich? The answer reveals a powerful, alternative way to build wealth.
Instead of paying out cash, Buffett has followed a different philosophy for decades. He essentially asks his shareholders, “What if, instead of giving you this dollar in cash, I reinvest it and turn it into more than a dollar of value for you inside the company?” This philosophy is the key to one of the greatest success stories in modern finance, demonstrating how a company can become more valuable each year without sending a single check to its owners.
What Are Dividends, and Why Do Most Investors Love Them?
For many people, the best part of owning stock is getting paid just for being an owner. When a profitable company decides to share a portion of its earnings directly with its shareholders, that cash payment is called a dividend. It’s the company’s way of rewarding you for investing in its success. In short, you own a piece of the business, so you get a piece of the profits sent to you as cash.
Think of it like a successful local pizza shop. At the end of the year, after all the bills are paid, the owner has a pile of profit. If she decides to take that money home to spend on her family, she’s essentially paid herself a dividend. This is exactly what a large company does when it sends a dividend check to its thousands of owners—the shareholders.
You can see why this is so popular. This dividend income can provide a steady, predictable cash flow, almost like a paycheck from your investments. For millions of people, especially retirees, dividends are a reliable way to help pay the bills. This makes it all the more surprising that one of the world’s most successful companies has famously avoided them for over half a century.
Berkshire’s Big Secret: What It Does Instead of Paying You Cash
If Berkshire isn’t sending out dividend checks, where does all its profit go? An owner of a business has a choice: take the year-end profit home, or use it to grow the business, perhaps by buying a bigger, faster oven to sell even more pizzas next year. For over 50 years, Warren Buffett has chosen to buy the bigger oven.
When a company chooses this path—reinvesting in itself—that money is called retained earnings. Instead of being paid out to owners, the profits are kept inside the company to fuel future growth. This is the fundamental choice at the heart of Berkshire’s strategy: pay shareholders cash today, or use that cash to build a more valuable business for tomorrow.
This isn’t just a theory; it’s how Berkshire reinvests its company earnings in the real world. For instance, for decades, the profits generated by See’s Candies weren’t distributed to shareholders. Instead, Buffett used that steady stream of cash to buy other businesses, making the entire Berkshire “pie” much, much larger for everyone who owned a slice.
At its core, Buffett’s decision rests on a single, powerful question: “Can I use this dollar of profit to create more than a dollar of value for my shareholders?” As long as the answer is yes, he keeps and reinvests the money. But how does keeping a dollar today make your shares so much more valuable down the road? The answer lies in a process that Albert Einstein supposedly called the eighth wonder of the world.
The Snowball Effect: How Reinvesting Profits Makes Your Shares Incredibly Valuable
That powerful process is compounding, but you can think of it as the snowball effect. Imagine a small snowball at the top of a very long, snowy hill. As it starts rolling, it picks up more snow, getting a little bigger. Because it’s bigger, it now picks up even more snow with each rotation. Over time, that tiny ball grows into a giant, unstoppable boulder. For Berkshire, retained earnings are the fresh snow, and time is the long hill.
This happens because the reinvested profits buy more assets that themselves generate profit. The earnings from GEICO might be used to expand Duracell’s operations. Now, both GEICO and a bigger Duracell are throwing off cash, which can be used to buy another company entirely. The business isn’t just growing—its rate of growth is speeding up.
So how does this make you money? Remember, your stock is a small piece of ownership in this ever-expanding collection of businesses. While you aren’t getting a cash payment today, the “pie” you own a slice of is becoming enormously more valuable. A stock’s price simply reflects what people are willing to pay for that slice, and they will pay a lot more for a slice of a giant pie than a tiny one.
The result of this strategy is stunning. From 1965 to 2023, Berkshire Hathaway’s value grew at an average rate that was nearly double that of the S&P 500, a benchmark for the entire US stock market. This compounding machine is what turned thousands of dollars into millions for early investors. But it only works if the person rolling the snowball is an expert.
Buffett’s Simple Test: Why Reinvesting Isn’t for Every Company
That powerful compounding effect, however, only works if the person in charge is an expert at finding great investments. This is why Warren Buffett holds himself and his team to a simple, yet incredibly strict, test. Before deciding to keep the company’s profits, he asks: “For every dollar I retain, can I create more than one dollar of real value for our shareholders?” If he’s confident he can turn your dollar of profit into, say, $1.10 worth of business value, he keeps it. If not, he believes that dollar belongs back in your pocket.
For most companies, this is a surprisingly hard test to pass. Think about a mature business that has already saturated its market, like a power utility serving a city with a stable population. Building another power plant might be a total waste of money if no new customers need electricity. For a business with limited ways to grow, the most responsible thing to do is return its profits to the owners as dividends, letting them decide where to invest that cash next.
This strict discipline is at the heart of Berkshire’s success. Buffett’s confidence that he can consistently pass his own test is what justifies holding on to all that cash. But what happens when even he has trouble finding a great new business to buy at a fair price? Interestingly, he has another clever way to use profits to make each shareholder’s slice of the pie more valuable, without ever sending them a check.
The “Shrinking Pie” Trick: How Berkshire Makes Your Shares Worth More
So, what happens when Berkshire is swimming in profits but can’t find a great new business to buy? Instead of letting that cash sit idle, Buffett sometimes uses a clever move that’s a bit like a magic trick. Imagine you and three friends co-own a pizza, each holding one of the four slices. Now, what if you had enough cash to buy one friend’s slice and simply make it disappear? Suddenly, only three slices would remain. Your single slice would instantly become one-third of the pizza instead of just one-quarter. You just became a bigger owner without lifting a finger.
This is exactly what happens in a share buyback, also known as a share repurchase. When Berkshire buys its own stock from the open market, it effectively removes those shares from existence. The total number of ownership “slices” shrinks, which means every remaining share now represents a slightly larger piece of Berkshire’s entire collection of businesses—from GEICO to Dairy Queen.
For shareholders, this is a powerful, quiet way to get richer. Your personal slice of the massive Berkshire pie gets bigger, making your stock more valuable over the long term. Unlike a dividend, no cash lands in your bank account. Instead, the value of what you already own is concentrated and increased.
Best of all, this method is more tax-efficient than a dividend. A cash dividend is taxable income the year you receive it, whether you need the money or not. With a buyback, the value of your stock grows, but you only pay taxes if and when you choose to sell your shares. This puts the control firmly back in the shareholder’s hands, which perfectly fits the Berkshire philosophy.
So, How Do You Actually Make Money from Berkshire Stock?
This leads to the most important question for any shareholder: If the company isn’t sending you checks, how do you get cash in your pocket? The answer is beautifully simple: you make money when you eventually sell your stock for a higher price than you paid. This profit is called a capital gain. While traditional dividends provide a steady trickle of cash, Berkshire’s strategy is to create a massive reservoir of value that you can tap into whenever you choose.
Warren Buffett’s logic is that shareholders can—and should—“create their own dividend.” Instead of the company deciding when to pay you, you are in complete control. If you don’t need cash, you simply do nothing and let your entire investment continue to grow untouched. But if you do need cash for a large purchase or to supplement your income, you can generate it yourself.
The process is straightforward and gives you total flexibility:
- Your investment grows. As Berkshire’s businesses become more valuable, so does your stock.
- You decide you need income. You then sell a small fraction of your shares—say, 1% or 2% of your holding.
- You get your cash. The money from the sale is your “homemade” dividend, while the vast majority of your investment remains in the market, ready to keep growing.
This approach puts you in the driver’s seat, letting you determine the timing and amount of your income. It’s a key reason why Berkshire is ideal for investors focused on long-term growth, not immediate, regular payments. You are choosing to let the expert farmer grow the whole farm bigger, knowing you can harvest a small piece of it on your own terms.
The Berkshire Bet: A Bigger Farm Tomorrow Over Golden Eggs Today
You started this journey wondering about a golden goose whose owner never shares the eggs. Before, a company that paid no dividend might have seemed broken or selfish. Now you see the strategy behind the silence: the farmer isn’t hoarding the gold, but using it to build a vastly more valuable farm for every shareholder.
This is the essence of Warren Buffett’s dividend philosophy. He believes in keeping every dollar of profit as long as he can turn it into more than a dollar of real business value. This powerful commitment to reinvestment creates the incredible compounding effect that has made Berkshire a legend—letting the snowball of value grow larger and faster each year.
When great investments are hard to find, the company has another tool: buying back its own stock. This simply reduces the number of slices in the pie, making your remaining piece bigger and more valuable. Both methods are focused on the same goal: growing the overall value of your ownership, not just giving you a small cash payout today.
Understanding Berkshire’s choice is more than a fun fact; it’s a fundamental lesson in wealth creation. You can now look at any investment and ask a smarter question: not just “What does it pay me?” but “How does it grow?” You’ve traded a simple answer for a more powerful understanding of how long-term value is truly built.