Warren Buffett’s Secret Sauce: Dividends vs Options as a Safe Substitute

Dear valued readers,

Today, we want to talk about Warren Buffett’s secret sauce – dividends. Buffett is perhaps the most famous investor of our time, and he has attributed a large part of his success to investing in companies that pay consistent dividends. In fact, he has said that dividends represent about 45% of historical stock performance.

But for many investors, dividends can be elusive. How do you find companies that pay good dividends, and how do you know if those dividends are sustainable? That’s where options can come in as a safe substitute.

Options allow investors to take advantage of short-term volatility in the market and harness blue-chip stocks with bright long-term prospects. By selling covered calls or puts, investors can generate premiums that rival, and often exceed, dividends. This approach is so prosaic that it almost seems not worth mentioning, except for one fact: not enough investors do it.

Consider Moody’s, one of Buffett’s top holdings. The stock’s quarterly dividend is 77 cents, but investors who own the stock can consider selling the April $320 Call for a premium of $2.13 which exceeds the stock’s current quarterly dividend. If the stock stays below the $320 strike price, investors can keep the premium. If the stock nears or exceeds the strike price, investors can sell the stock or adjust the position to avoid assignment.

Alternatively, investors who want to own the stock can sell the April $280 Put for a premium of $9.85. This put sale positions investors to buy the stock at an effective price of $270.15 (put strike minus premium), if the stock remains above the strike price, investors keep the premium. If the stock is at or below the strike price at expiration, investors can buy the stock.

These investment ideas never attract the attention of the options market’s speculative frenzies, including zero-dated options. But they are time-proven and grounded in the fundamentals of investing. Instead of trying to guess the next market move, focus on owning quality stocks and reinvesting dividends. Let the market mob wear itself out debating the latest topic du jour, and use the uncertainty to your advantage.

In conclusion, remember that if you don’t know the horse, bet the jockey. Instead of trying to predict the future, focus on the known qualities of well-run companies and use options to enhance returns and reduce risk. With patience and discipline, you can build a portfolio that will stand the test of time.

Thank you for reading!