Co-authored with “Hidden Opportunities.”
With 80+ years of experience in the financial markets, Warren Buffett is a wealth of investing wisdom. Our Investing Group places heavy emphasis on generating current income and works to transform our investment portfolio into a reliable cash-producing machine. We draw much inspiration from Mr. Buffett’s techniques and seek companies and sectors that demonstrate sustained profitability and competitive advantage while being run by quality management and trade at prices below their intrinsic value.
But, amidst billions of successful investment dollars over decades, investors seem to forget some elements of The Oracle Of Omaha’s success. We often see comments incorrectly pointing out that Buffett would never do certain things that he actually has repeatedly pursued with massive success.
#1: Who said Buffett doesn’t buy high yields?
Investors quickly point out that Buffett’s company, Berkshire Hathaway (BRK.A)(BRK.B), doesn’t pay dividends, but that is beside the point. Over 30 of Berkshire’s 48 holdings pay growing dividends to the conglomerate. Projections for FY 2023 show that Berkshire could rake in almost $6 billion through dividends paid by its holdings. So Mr. Buffett likes collecting billions in dividends to utilize as he (and his team) see fit; he just doesn’t want to share it with his investors.
In each of the past three decades, we can point out one significant high-yield investment made by the iconic investor during distressed market (or sector) conditions.
High Yield Deal #1
In 1987, Mr. Buffett agreed to buy a 12% stake in Salomon Brothers Inc., one of Wall Street’s most prominent investment banking firms, for $700 million. The funds were to be used by Salomon to finance the repurchase of its own shares that another company was looking to dispose of. As part of the deal, Mr. Buffett locked in a 9% dividend for three years from Salomon preferred shares with a right to convert to common stock.
It was a wild ride since then, with several business-wrecking, profit-shedding scandals that broke out in 1991, requiring Mr. Buffett to take control of the company, overhauled leadership, restore confidence in operations, and eventually cash out of his investment with almost 2x returns when Salomon was acquired by Travelers in 1997.
High Yield Deal #2
In 2008, at the peak point of the GFC (Great Financial Crisis), the legendary investor invested $5 billion in Goldman Sachs (GS) to strengthen the firm’s capitalization and liquidity amidst turbulent times for the financial services industry. The investment was made in exchange for a 10% yielding preferred security issued by GS to Berkshire Hathaway with warrants to buy an additional $5 billion of common stock at $115/share. Source.
Mr. Buffett was underwater on his warrants for several years, with drawdowns exceeding 50%, but he collected his juicy dividends all the way and sold his position for a sizable gain in 2020.
High Yield Deal #3
In 2019, Mr. Buffett assisted Occidental Petroleum (OXY) in acquiring Anadarko Petroleum in a takeover battle with Chevron (CVX) by investing $10 billion in exchange for preferred shares, which entitled his organization to an 8% dividend through 2029, after which, OXY can repurchase them for 105% of the par value.
As of October 2023, OXY redeemed ~5% of these preferreds at 110% of the par value, and Mr. Buffett continues collecting $200 million every quarter from the prudent investment.
Warren Buffett may use his billionaire influence over the markets to make exclusive deals, but let’s not lose sight of the fact that he loves collecting high yields.
#2: Who said Buffett doesn’t diversify?
Warren Buffett’s portfolio of public holdings has over 50 names, and this doesn’t include 65+ subsidiaries, including wholly-owned entities like BNSF, Berkshire Hathaway Energy, Geico, etc. One may be quick to point out the concentrated position in Apple (AAPL), but please remember that the original investment was ~$31 billion, which grew several-fold over the years.
Portfolio allocation-wise, many holdings may be small because several holdings only appreciated a little after a certain point. But remember, Mr. Buffett still has billions invested even in his smallest positions, continues to collect his dividends, and doesn’t like to lose money.
#3: Who said Buffett doesn’t sit on large drawdowns?
You are sadly mistaken if you think Warren Buffett buys things just before they soar. We already pointed out several investments that were underwater for years before they turned profitable.
The Oracle of Omaha held on to the bulk of his portfolio even during the GFC when he personally registered ~$25 billion in paper losses, and his Berkshire lost its revered AAA rating.
Mr. Buffett’s investing patience is battle-tested, and he means it when he says that his favorite holding period is forever. Whether the stock price moves up or down, he gets paid for his time and money through waiting fees – dividends!
#4: Who said Buffett doesn’t employ leverage in his investments?
Warren Buffett loves the insurance business, and the most significant benefit was the cash it generated, which Berkshire Hathaway could put to work in ways they saw fit.
“This means that our $58.5 billion of insurance “float” – money that doesn’t belong to us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable.” – Warren Buffett in 2009.
Well, insurance floats aren’t exactly zero-cost. These companies need to make sure they charge the right premiums based on accurately pricing the risks in each policy. However, unforeseen things can happen, and insurers can lose money through large claims. High-quality underwriting is a prerequisite to maintaining profitability.
But Berkshire invests the insurance float to their advantage, and Buffett and Charlie Munger are very proud of this benefit.
At our Investing Group, we draw much inspiration from Mr. Buffett’s experience, wisdom, and track record. We maintain a highly diversified portfolio of equities, preferred stock, and baby bonds, and we are active buyers when markets are fearful. In this fearful market, our Investing Group is heavily focused on buying discounted fixed-income securities to lock in large yet steady yields for the foreseeable future.
We actively diversify our portfolio across +45 securities, comprising companies and sectors prioritizing dividend payments. Our model portfolio targets a +9% overall yield, and we pounce on irrational sell-offs as long as it benefits our income stream. Like Mr. Buffett, I get paid to wait for markets to turn around and am not afraid of some drawdowns. And since I do not wield nearly any influence on the decision-making within my invested companies, diversification is a crucial ally to maintaining my income stream and protecting my financial well-being.
My objective is not to time the market for bottom prices but to organically grow my income with the opportunities presented by Mr. Market. Every month, my portfolio produces healthy cash returns that I can use in whatever way I see fit – either by re-deploying into the market or using it towards my living expenses. I am applying the Income Method towards my financial future, and this is the beauty of income investing.