NEW YORK (TheStreet) -- Looking for value? Then tap the ultimate value investor, Warren Buffett.
This article will show you the seven dividend-investing secrets that Buffett uses to grow his wealth consistently. Our findings are based on his spoken and written statements, as well as his holdings.
Take a look at Warren Buffett's five largest holdings:
All five of Buffett's largest holdings pay dividends. No doubt about it -- Buffett is a dividend growth investor. Wal-Mart has paid increasing dividends for over 40 years; Coca-Cola has paid increasing dividends for over 50 years. American Express, Wells Fargo, and IBM all pay dividends although they do not have as impressive a streak as either Coca-Cola or Wal-Mart.
Jim Cramer, Mad Money star, co-portfolio manager of Action Alerts Plus, a charitable trust portfolio, and Real Money columnist. Is also a fan of many of these stocks and Buffett's strategies. On Mad Money this week, he outlined five Buffett dividend picks that he likes. Now that the market may be slowing down, it's an especially good time to consider these plays, Cramer writes this week in Real Money, "Slowdowns tend to favor the stocks with bigger dividends because a slowdown presumes lower interest rates and lower interest rates mean stocks with outsized yields tend to prevail."
As usual, Buffett's advice seems especially prescient for whatever the market is up to.
Buffett's dividend investing wisdom is explored in this article. (You will find many similarities between these secrets and The 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing are based on the teachings of many great investors -- like Buffett -- and backed with historical financial results and academic studies.)
1. Look for Businesses with Long Corporate Histories
"Time is the friend of the wonderful company, the enemy of the mediocre" -- Warren Buffett
Buffett invests in businesses with long corporate histories. Wells Fargo, American Express, and Coca-Cola were all founded in the 1800s. IBM was founded in 1911. Wal-Mart was founded most recently out of Warren Buffett's top five. The company is practically a start-up compared to Coca-Cola, Wells Fargo, and American Express -- it's been around since 1962.
Companies with long histories offer investors fewer surprises. These businesses know exactly what they do, and they do it well. Very few businesses continue to be successful for decades. As technology progresses, industries change. Consumer tastes change as well. For a business to thrive for such long periods of time it must either continuously reinvent itself, or exist in an industry that changes slowly.
In looking at Buffett's top five holdings, we can see that four of the five stocks exist in slow-changing industries. The banking industry is very slow-changing. Technology advances and the financial creativity of the past 30 years have changed things somewhat for customers and the banks themselves, but they do not change the core business-model of banking, which is to provide safety and liquidity of capital. American Express is in a similar industry. Technology may increase the speed and frequency with which we can access our credit cards, but it does little to change the fact that consumers demand credit.
Coca-Cola has been selling soda for well over 100 years. The company has since diversified into juice, water, and tea to offer virtually every type of consumer a ready-to-drink beverage that appeals to them. The ready-to-drink beverage industry is notoriously slow changing. Soda volume has been slowly declining in the U.S. for years, but the decline is very gradual. This gives Coca-Cola plenty of time to change its strategy.
The advantage of investing in businesses with long corporate histories is that they are more likely to continue generating cash flows going forward. The slower an industry changes, and the longer a business has been around, the more likely that business has a strong competitive advantage that will survive far into the future. Investing in businesses with long histories is a conservative approach to investing. Warren Buffett looks for much more than just a few years of success before he is confident a business truly has staying power and a lasting competitive advantage.