Opinion – Grain for Grain: Dividends or income, which Warren Buffett focuses?

The idea of ​​having investments that provide continuous cash flow without having to do any work appeals to most. This concept is commonly known as living off income. However, there is confusion about what this concept actually represents and which investment is best to make.

The term living on income is usually attributed to the act of receiving a certain periodic payment. It is customary to think of this payment as a dividend, or even receiving rent on a property.

Thus, investors who intend to earn income end up concentrating their portfolios in risky assets or assets that only pay cash flow.

Living off an income is not receiving a cash flow, but having a portfolio that has enough income to cover your costs.

Therefore, what is important is not the flow of payments, but the total income. That is, if your equity tomorrow is greater than today and by how much.

Innocently, novice investors delude themselves into believing that receiving dividends increases equity. Dividend does not increase equity.

The average investor is unaware, but it is very important to be aware that when a stock or real estate fund pays a cash flow, the asset price is reduced by this payment.

For example, assume you have a stock worth $100. Assume it declares a dividend of $1 tonight. Tomorrow morning, you will have a share priced at BRL 99 plus BRL 1 in dividend. So the next day you have the same equity you had the night before.

Your equity only grows if the asset appreciates.

Therefore, it is no use evaluating only the so-called dividend yield of a product. This is not necessarily return, but it could just be cash flow.

Large income investors don’t just focus on the dividend, but evaluate the asset’s total return potential. Warren Buffett himself has spoken out against the payment of dividends and his company’s stock has never paid dividends in its entire history.

Buffett focuses on income.

So, if you want to live on income, your focus should be on the appreciation of the assets in your portfolio and not on the cash flow you receive. This is true for all assets, including real estate.

I reinforce that I don’t mean that you shouldn’t have assets that pay dividends, but you should consider the return on appreciation they provide.

After all, it is better to have an asset that yields the CDI, whose yield is 13.65% per year, than to have something like a property that pays 4.5% per year in rent and you don’t know if it will appreciate. In this case, you could be losing more than 9% a year in the appreciation of your equity.

Michael Viriato is an investment advisor and founding partner of Investor’s House

Follow and like De Grão em Grão on social media. Follow the lessons of investing in the Instagram.

If you have any questions or suggestions for themes, please feel free to send by email.