This article presents a more detailed explanation than I offered in class a week or two ago. It’s actually a pretty simple and logical approach: acquire stocks that pay dividends and then use those dividends to purchase necessities for business operations, repurchase your own stock when it becomes undervalued, and save cash for strategic acquisitions.

This provides some explanation as to why Berkshire’s P/B ratio stays around the 1.33 mark as mentioned in “The Intelligent Investor.”

On a personal level, this may cause reconsideration of blindly reinvesting dividends from mutual funds in shares of that fund. Perhaps you should “pull a Buffett” and follow a personal 1-2-3 approach:

1. Reinvest dividends in yourself: pay for additional schooling or training, faster computer to write your code if you are a freelance consultant, high efficiency washing machines if you own a laundromat, etc.

2. Repurchase shares of the mutual fund if the P/B is reasonable relative to the long-run average.

3. Accumulate the remaining dividends while looking for the next money-generating acquisition.

Dr. Moore out.

Why Warren Buffett Loves Dividends, But Doesn’t Pay Any
The Motley Fool

Berkshire Hathaway has a portfolio full of dividend stocks, but doesn’t pay a dime to its shareholders. Read the full story

Shared from Apple News