Earning income from stocks

May 9, 2005 7:44 PM

How do shareholders of Berkshire Hathaway earn income? It seems that dividends haven't been issued since 1967. Short of selling the stock, isn't the investment "tied up"?

On a broader note, how does one earn money from stocks?

I can think of 2 ways:

1)Dividends.
2)Sell it off for a profit.

..and maybe, earn interest off it (if so, how?).

posted by daksya to work & money (19 comments total)

Dividends or capital gains through sale after appreciation of the instrument. It's the same as any other stock investment -- hold until profitable, sell and enjoy the capital gains.

-s
posted by fet at 7:51 PM on May 9, 2005

One can sell covered calls to earn income on an equity position.
posted by izizi at 7:55 PM on May 9, 2005

Short of selling the stock, isn't the investment "tied up"?

You could use the stock as collateral for a margin loan. That way you could accumulate the capital gains while also investing in something with a more immediate income stream.

(This is really seriously not investment advice!)
posted by pompomtom at 8:02 PM on May 9, 2005

In 1978 you could purchase a share of Berkshire Hathaway for $178 ($533 in 2005 dollars). The closing price today for a share was $83,250.
posted by MLIS at 8:13 PM on May 9, 2005

Buffett's whole strategy is buy and hold, so I would say most Berkshire Hathaway shareholders don't keep the stock for short term profits. If you want dividend income you would go for something else. Buffett has long advised buying a few stocks and holding onto them versus active trading, which ends up eating your capital with Capital Gains and brokerage fees.
posted by letterneversent at 8:30 PM on May 9, 2005

How do shareholders of Berkshire Hathaway earn income?
Many of them were rich to begin with.
posted by spilon at 9:07 PM on May 9, 2005

In 1978 you could purchase a share of Berkshire Hathaway for $178 ($533 in 2005 dollars). The closing price today for a share was $83,250.

In case you're wondering why the per-share price is so high, it's because BRKA, unlike most stock, has never split. The company does offer a "smaller" share, BRKB, which closed at $2776 today. If you had a choice of putting $3000 into a mutual fund or into BRKB, the latter would certainly be tempting.
posted by kindall at 9:34 PM on May 9, 2005 [1 favorite has favorites]

There are plenty of BRKA investors who use it to fund their retirement. In the past 20 years, the best way to do so has simply been to borrow against it with conventional secured loans (not margin loans), since its rate of appreciation has easily beaten out the interest rates you pay on the loans.

You can also get a decent retirement income by selling three or four shares a year -- trades occur regularly, although brokerages typically have a special way to arrange them.

Kindall, BRKB basically is a closed-end mutual fund share. Buffet and Munger often talk about the company that way, although they always hedge that they hope that the SEC never takes that view, since they wouldn't want to register Berkshire-Hathaway as an investment company.
posted by MattD at 4:03 AM on May 10, 2005

How do shareholders of Berkshire Hathaway earn income?

Warren has raised the idea of declaring dividends recently, but that probably is a remote possiblity.

On the other hand, its a little known fact is the Class A's are convertable to Class B's one way at a ratio of 30-1.

So it is conceivable that an individual holding only Class A shares could convert them to Class B's, and then sell the shares individually thus generating income (I'm a Financial Engineer and get paid to think of such strategies).

In terms of selling Covered Calls, I can't seem to find any listed options. And unless you're holding a really, really large position in Berkshre, your transaction costs will render such trades (i.e., OTC options) uneconomical.

We've talked about Berkshire before, and I'd stay away from it as an investment. Unless, of course, you're interested in getting a copy of the annual report and an invite to the shareholders meeting.

There are loads of other vehicles that will generate decent dividend income.

I personsally like any Closed End Fund, paying monthly, yielding about %10 and selling at a discount to Net Asset Value. Structure your portfolio correctly and you'll get a decent return and yield : I'm currently generating about %11.75 on my personal assets. AER is higher as these securities pay monthly.

But then again I'm very conservative and don't really care for all the fun and excitment that comes along for the ride with any company that isn't paying me to hold it's shares.
posted by Mutant at 4:10 AM on May 10, 2005

There are loads of other vehicles that will generate decent dividend income.

I personsally like any Closed End Fund, paying monthly, yielding about %10 and selling at a discount to Net Asset Value. Structure your portfolio correctly and you'll get a decent return and yield : I'm currently generating about %11.75 on my personal assets. AER is higher as these securities pay monthly

As which of us would not? Any examples?
posted by IndigoJones at 4:45 AM on May 10, 2005

Well I haven't put any of my own money in the market for quite a while, so this should not be construed as either a solicitation to buy or sell any of the securities I might discuss here, and I disclose that I do have positions in all of these so here goes :

CornerStone Financial, currently yielding about %16 but trading at about a %5 premium to NAV. Only chase this if you're very yield hungry; over the past three months or so the price has really declined (shrinking the premium). I haven't bought this for a while and if I established a new or added to an existing position, I'd definitely have a stop loss order in place.

Debt Strategy, currently yielding about %10 and trading at a very slight discount to NAV.

Evergreen Income, currently yielding about %10.7 and trading at a light discount to NAV (about %0.05).

Keep in mind that you SHOULD NOT trade based on Yahoo's data; any decent broker will have more accurate data, or at least a second, corroborating opinion.

Finally Closed End Funds typically swing from a premium to Net Asset Value to a discount and back again over time. I always try to purchase these securities when they are at a discount to NAV, (in other words, you get $1 worth of cash generating assets for less than $1), as this gives you a safety margin.

I've also got some REITS that I've held for years, but this sector has attracted so much attention since the dot-com collapse yields are all single digits at this point.
posted by Mutant at 6:53 AM on May 10, 2005 [2 favorites has favorites]

I always thought that most people who aren't in BH for the long haul, but for the investment report. Basically, you're paying for Warren Buffet's financial advice.
posted by mkultra at 7:40 AM on May 10, 2005

I believe that holding even one share of Berkeshire Hathaway gets you a 5% discount on GEICO car insurance. I was mentioning it to my neighbors -- I'd bet their car insurance is as much as $5,000 a year given their four late-model cars, two licensed teenagers, and their asset and income protection requirements, so that $250 discount is the equivalent of a 14% pre-tax return on the BRKB before any income or appreciation on the security.
posted by MattD at 10:08 AM on May 10, 2005

Daksya: to answer your question, many stocks do not pay dividends. People buy them because they figure the value of the stock will increase over time. Just like someone might buy a plot of land or a work of art and hope for future appreciation.

In each case, the investment is "tied up," unless you can figure out a way to pull your cash out without actually selling the asset. The easiest way to do this is a loan secured by the asset--like a home equity loan. You could put up your Berkshire shares as collateral for a loan. You get the use of the cash, the bank gets dibs on your Berkshire shares if you can't pay the loan back when due.
posted by Mid at 10:36 AM on May 10, 2005

On a broader note, how does one earn money from stocks? I can think of 2 ways:

1)Dividends.
2)Sell it off for a profit.

You could short the stock. This probably comes into number 2 above, but might not have been something you'd considered.

Of course, shorting Berkshire Hathaway is a quick way to go bald with stress.
posted by wackybrit at 10:39 AM on May 10, 2005

Outstanding MattD, I'd totally forgotten about discounts and other perks Berkshire offers to shareholders.

I googled about but could only find some information on BegginersInvest.About.com, specifically

"Berkshire Hathaway, investment vehicle of billionaire Warren Buffett, offers some of the best shareholder perks in the business world. Investors are treated to discounts at GEICO Insurance, as well as large price reductions during the weekend of the shareholder meeting on merchandise from Borsheims Jewelry and Fine Gifts and Nebraska Furniture Mart. The discounts can be so large, in fact, they can pay for a share of the company's class B stock (current price: $3,000 each)."

There might be more details buried on Berkshire's web site, but they clearly pitch for Geico and Borsheims on the top level.

Oh, I also reversed the conversion ratio in my first post : one Class A is convertible to 30 Class B shares.
posted by Mutant at 11:26 AM on May 10, 2005

Mutant, thank you. Agreed, not a happy field for investment money these days. Though I can't imagine things are much better anywhere else. Or perhaps they are. Even Mr Buffett was buying China.
posted by IndigoJones at 2:43 PM on May 10, 2005

Can anybody point me at definitive information on this BRK based GEICO discount? I've found a bunch of second-hand claims but can't find anything on the GEICO or BRK websites indicating special rates.
posted by mosch at 7:36 PM on May 10, 2005

Can anybody point me at definitive information on this BRK based GEICO discount? I've found a bunch of second-hand claims but can't find anything on the GEICO or BRK websites indicating special rates.

(On preview this is sort of long winded and possibly over-explanatory. Sorry about that.)

Hi, mosch. The discount is actually part of GEICO's Partnership or Sponsored Marketing Discount program, and it's not actually advertised on either site (the information is there but sort of hidden). It's available to Berkshire Hathaway shareholders, but it's also available to members of certain credit unions, professional organizations, alumni groups, and so on. If you already have one (i.e.: a discount based on your credit union membership), you won't be given an additional discount as a shareholder.

Hope that helps! FWIW, here is a complete list of all of the organizations that will get you the discount. A Caveat: the discount is only available to preferred policyholders, so if you're not in the preferred companies (GEICO or GEICO General vice GEICO Indemnity or Casualty), it probably won't benefit.
posted by mewithoutyou at 11:26 PM on May 10, 2005