Understanding Berkshire Hathaway’s Dividend Policy
Imagine finding a goose that lays golden eggs, but it never gives any of them to you. Instead, it uses the gold to build itself a bigger, better nest. In many ways, that’s what owning stock in Berkshire Hathaway is like—it’s one of the most successful companies in the world, yet it famously doesn’t pay its owners a cash reward.
For most other large, profitable companies, these rewards are a standard practice. They are called dividends, and you can think of them as a direct share of the profits sent to you as a thank-you for being a part-owner. Companies like Coca-Cola and Procter & Gamble have paid them for decades, making them a cornerstone of many investment plans.
Yet Berkshire Hathaway, guided by the legendary Warren Buffett, deliberately chooses a different path. The company is enormously profitable, but its policy on paying dividends has been a firm “no” for over half a century. This isn’t because the company is struggling; it’s a core part of its incredibly successful strategy.
Where does all the money go? And why do savvy investors consider this a brilliant move rather than a drawback? The answer reveals a powerful philosophy for creating wealth. The unique logic behind Berkshire Hathaway’s dividend policy uncovers the genius behind saving the golden eggs to build a bigger nest.
How Most Companies Reward You: A Simple Guide to Dividends
When you own a share of stock, you own a tiny piece of a business. If that business has a profitable year, it has a decision to make: what should it do with the extra cash? For many companies, the answer is to share the success directly with their owners. This cash payment, sent to you for each share you hold, is called a dividend. It’s the company’s way of saying, “Thanks for being an owner; here’s your slice of the profits.”
Think of the corporate world’s most established names, like Johnson & Johnson or McDonald’s. These are mature companies with predictable earnings. They don’t need every last dollar to build new factories or fund risky projects, so they can afford to distribute a portion of their profits to shareholders. These regular payments are often seen as a sign of a company’s financial health and stability, making them attractive to investors looking for a reliable income stream.
For many investors, receiving dividends is a huge part of the appeal of owning stocks. It provides a tangible return on your investment without you having to sell your shares. You get to keep your ownership in the company while also receiving cash along the way. This steady reward is a cornerstone of traditional investing, which makes it all the more curious why a company as successful as Berkshire Hathaway has a famous policy of not paying them.
Why Berkshire Hathaway Has Paid a Dividend Only Once (in 1967)
In its entire modern history under Warren Buffett, Berkshire Hathaway has paid a dividend to its shareholders exactly once. It was a tiny payment of 10 cents per share back in 1967, a move Buffett has since joked was a huge mistake he must have made while in the bathroom. This isn’t an oversight; it’s the cornerstone of a deliberate, long-term philosophy. While other companies use dividends to return profits to owners, Buffett has always believed he had a better use for that cash.
To understand his reasoning, you first need to picture what Berkshire Hathaway is. It’s not a single company that makes one thing, but a conglomerate—a big company that owns a bunch of smaller, different companies. You probably know many of them: it owns all of GEICO, Duracell, and Dairy Queen, and holds huge stakes in giants like Apple and Coca-Cola. This structure is key. When these businesses earn money, the profits flow up to the parent company, Berkshire.
Herein lies the fascinating twist. While Berkshire itself doesn’t pay a dividend, it happily collects billions of dollars in dividends from the companies it owns, like Coca-Cola. So, where does all that money go if it isn’t sent to shareholders? Buffett’s answer lies in a simple but powerful rule he created for deciding what to do with every dollar of profit the company keeps.
The One-Dollar Test: Buffett’s Simple Rule for Deciding Where Profits Go
Warren Buffett views every dollar of profit that flows into Berkshire’s bank account not as his money, but as his shareholders’ money that he is temporarily managing. This perspective forces him to answer a crucial question: What is the absolute best way to use this dollar for its rightful owners?
To guide this decision, he created a simple but powerful challenge known as the “one-dollar test.” The rule is this: for every dollar of profit he keeps, he must be confident he can turn it into more than one dollar of long-term value for the company. If he can use that dollar to buy a new business or make an investment that will be worth more than a dollar down the road, he keeps it. If not, he believes he should return it to shareholders.
Imagine you own a successful bakery that made a $10,000 profit. You could take that cash home. Or, you could use it to buy a new, more efficient oven that lets you bake twice as many cakes, potentially earning you $20,000 next year. By taking the cash, you lose the opportunity to grow your bakery. Buffett is constantly weighing that exact choice: a dollar in a shareholder’s pocket today, or a chance to make the entire company much bigger for them tomorrow.
For over 50 years, Buffett has passed his test with flying colors. His stunning success is why shareholders let him reinvest their cash instead of taking a dividend. He uses these retained earnings to make the whole business more valuable over time—a strategy a lot like growing an entire orchard instead of just selling the apples.
The First Alternative: Growing an Orchard Instead of Selling Apples
When Warren Buffett passes his “$1 test” and decides to keep the company’s profits, they become what’s known as retained earnings. Think of this as the company’s dedicated growth fund. Instead of handing out the cash from this year’s harvest (a dividend), he’s keeping the seeds to plant for next year. This simple decision is the first and most powerful alternative to paying a dividend, and it’s the primary engine behind Berkshire’s legendary growth.
This strategy unlocks the power of compounding on a massive scale. The profits from Berkshire’s businesses, like GEICO or Duracell, are used to buy or invest in more businesses. Those new businesses then generate their own profits, adding to the pile of retained earnings. This creates a snowball effect: the money the company uses to grow gets bigger every year, allowing it to grow even faster. It’s a cycle of profit, reinvestment, and accelerated growth.
The results of this strategy speak for themselves. Berkshire Hathaway started as a struggling textile mill. By using the profits from its early insurance operations to buy great companies like See’s Candies, and then using the profits from those businesses to buy others, it transformed into a sprawling collection of world-class brands. The retained earnings from one successful year became the fuel to purchase the next success story, over and over again.
Reinvesting to grow the entire company is Buffett’s preferred move. But what happens when there aren’t any new orchards worth buying? This leads to his second-favorite alternative, a clever way to make each shareholder’s existing slice of the pie more valuable without handing over a single dollar in cash.
The Second Alternative: Making Your Slice of the Pie Bigger, Invisibly
Sometimes, even for a giant like Berkshire, there are no new companies available at a fair price. When this happens, Warren Buffett doesn’t let the cash sit idle. He turns to his second-favorite option for returning value to shareholders: a share buyback.
To understand how this works, imagine the entire company is a large pizza cut into eight slices, and you own one of them. If the company uses its profits to buy back and remove four of those slices from the market, there are now only four slices left in total. You still own your single slice, but it has suddenly become a much bigger piece of the pizza—it’s now one-fourth of the pie instead of one-eighth. Your ownership stake just became more valuable without you lifting a finger.
This is precisely how the Berkshire Hathaway share buyback program functions. The company uses its cash to purchase its own shares on the open market and essentially “retire” them. With fewer shares in existence, each remaining share represents a slightly larger ownership percentage of the entire company—including its vast collection of businesses like GEICO and Dairy Queen. It’s a way of rewarding shareholders by making their existing investment more concentrated and, therefore, more valuable over time.
Unlike a cash dividend, which lands in your bank account as a taxable payment, a buyback increases your wealth more subtly. It’s a quiet, powerful method for increasing shareholder value that aligns perfectly with Buffett’s long-term philosophy. The goal isn’t a small cash reward today, but a significantly more valuable asset for tomorrow.
Does It Work? Comparing Berkshire’s Growth to the Broader Market
The ultimate question is whether giving up a dividend for decades of reinvestment and buybacks has actually paid off. To find out, we can compare Berkshire Hathaway’s performance against the S&P 500, a benchmark that tracks 500 of the largest U.S. companies. Think of the S&P 500 as the report card for the entire stock market, and we’ll even include the dividends those companies paid out to make it a fair fight.
The historical record is staggering. While the S&P 500 has provided solid growth over the decades, Berkshire Hathaway has operated in a league of its own. As the chart below illustrates, the power of compounding every dollar of profit—instead of paying it out—created a growth curve that turned a steady climb into a steep mountain. This isn’t the result of a few lucky years; it’s the direct consequence of a disciplined, fifty-year strategy of using profits to buy more assets that generate even more profits.
This remarkable outperformance is the ultimate justification for the no-dividend policy. For Berkshire shareholders, the trade-off has been clear: forfeit small, regular cash payments in exchange for the chance to see their initial investment grow to a truly life-changing scale. But this leaves one practical question: what if you love the growth story but still need to generate income? As it turns out, you can have your cake and eat it, too.
No Dividend, No Problem: How to Create Your Own ‘Berkshire Dividend’
While the incredible growth is fantastic, many investors rely on stocks for regular income. If Berkshire doesn’t cut you a check, how do you generate income from your investment? The answer is a strategy that Warren Buffett himself has endorsed: creating a “homemade dividend.”
This approach is surprisingly simple. Instead of the company deciding how much cash to give you, you decide for yourself by selling a very small portion of your shares each year. If your total investment is growing by 8% in a year, for example, you can sell off 2% to use as cash and your remaining investment is still worth 6% more than it was at the start of the year. You get your income, and your wealth continues to grow.
Here’s how a homemade dividend works in three straightforward steps:
- Decide your need: Determine how much cash you need for the year—let’s say $3,000.
- Do the math: If your total Berkshire holdings are worth $100,000, that $3,000 is 3% of your total.
- Sell the portion: You would then sell just 3% of your shares to generate your cash.
This approach puts you in complete control, allowing you to adjust your “dividend” up or down as your needs change. It’s a powerful way to turn Berkshire’s long-term growth into practical, spendable cash without waiting for the company to change its policy.
So, Will Berkshire Ever Pay a Dividend?
The mystery of why a company as successful as Berkshire Hathaway doesn’t share its profits through dividends reveals a powerful strategy: a deliberate choice to reinvest every available dollar, compounding value to make the entire company worth more tomorrow than it is today.
The answer to the question is likely yes. Warren Buffett has stated that the moment will come when the company is so large it can no longer find enough attractive opportunities to turn one dollar of profit into more than one dollar of future value. When that day arrives, the cash will finally flow back to its owners.
For now, the no-dividend policy is a powerful signal of confidence. It’s management’s bet that they can still grow the whole orchard faster than you could with a handful of apples. The next time you encounter a company that retains its earnings, you’ll see it not as a withheld reward, but as a strategic vote for a much bigger future.