Buffett Makes A Solid Case Against Relying On Dividends Read more: http://money.usnews.com/money/blogs/On-Retirement/2013/05/10/the-case-against-dividends-for-retirees#ixzz2TSIYVtSU

The flight to Omaha gave me an opportunity to read Berkshire’s annual report, including Buffett’s famous letter to shareholders. I highly recommend the letter to any investor, regardless of whether you own Berkshire stock. Buffett’s discussion of dividends (pages 19 to 21) was especially interesting. In three pages Buffett gives investors everything they need to know about dividends. He begins his discussion with a question that has puzzled many: “A number of Berkshire shareholders – including some of my good friends – would like Berkshire to pay a cash dividend. It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves.”

It’s a fair question, and one that Buffett handles deftly. Through the use of a hypothetical company, he demonstrates that investors are better off if a company keeps all of its earnings rather than pay dividends, so long as it can and will put those earnings to good and profitable use. Buffett compares two hypothetical companies, one that retains all its earnings and one that pays a dividend. Spoiler Alert: the hypothetical company that retained its earnings proved a better option for investors than the one paying dividends.

Source: Business Insider

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