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When interest rates are as low as they are right now, currently under 2%, investors have to turn to stocks to find higher yields.
But according to Warren Buffett, chair of Berkshire Hathaway Inc. (NYSE: BRK.B), chasing after yield with risky or exotic investments is, well, just plain stupid.
While the Oracle of Omaha hits the nail on the head most of the time, we think he's a little short of the mark here. In fact, just like Buffett's preaching of passive investing, he doesn't always follow his own advice, and that's the case here too.
Today, we'll show you why Buffett doesn't follow his own advice, including three dividend stocks that can offer you healthy yield and upside potential...
Why Buffett Likes Dividend Stocks
Now, Buffett isn't completely wrong here.
What he means is that investors should always live within their risk tolerances and personal financial situations. Sometimes that means discarding tried and true safe investments in favor of taking on higher risk. That could mean buying a 10-year bond vs. a 1-year bond. Or it could mean limited partnerships investing in cancer cures or Hollywood blockbusters.
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Grandma living on a pension should not be buying natural gas well leases. Or even junk bonds. That little bit of extra promised return may not be worth it if the investment goes south.
Retirees, especially, need to be careful. If they were used to getting 8% on their money and now they are barely getting 1% or 2%, they could end up losing a lot more if they chase riskier assets.
Remember, a high yield investment only works when it doesn't go bankrupt. After all, it's only a promised rate of return. There are no guarantees.
That's why we like to invest in some of the best dividend stocks on the market. While stocks require a higher risk tolerance than a savings account, a reliable dividend-paying stock can provide you stable returns.
In fact, it's something Buffett looks for himself.
Berkshire looks for stocks that reward shareholders, with both price appreciation and with healthy dividends. Buffett even negotiated a much larger dividend for Berkshire's shares of Occidental Petroleum Corp. (NYSE: OXY) when that deal was in the works. He purchased $10 billion in Occidental preferred stock that paid an 8% dividend in order to help Occidental buy out Anadarko Petroleum back in April, 2019. Retail investors had no shot at getting this yield.
That's important because the income from the investment gave Berkshire returns even as the market was volatile.
He wasn't worried when shares in OXY and in energy stocks in general fell apart last year. Berkshire shareholders were enjoying that nice, fat 8% dividend payment while they waited for the rally. And Berkshire also started to snap up common shares in the company for cheap.
But opportunistic buying aside, it's really a very simple concept. Dividends are great for investors and are often a sign the company is stable enough to own over the long haul. That's why we don't follow Buffett's advice on accepting the 1% return from your savings account.
The good news is that you don't have to be Warren Buffett to be a prudent investor. And you don't have to take on huge risks to get yields. There are plenty of stable, well-run businesses that reward investors with healthy total returns.
Here are three of our favorites...
3 of the Best Dividend Stocks with Upside
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