Why Doesn't Berkshire Hathaway Pay a Dividend?

If you're thinking of investing in Warren Buffett's company Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), that's great, as it's a terrific business. If you're looking for dividend income from the stock, though, I have some bad news for you: Berkshire Hathaway doesn't pay a dividend. However, that might change one of these days.

Warren Buffett. Image source: The Motley Fool.

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Generally speaking, companies tend to start paying regular dividends to shareholders when they have more cash than they can put to productive use. Companies often want to use their earnings to drive more growth -- by hiring more workers, buying more advertising, building more factories, and so on. They might also use cash to pay down debt, repurchase shares, or reward staffers, among other options.

Many companies have more uses for cash than actual cash, and others have more cash than uses. In Berkshire's case, the company is a cash-generating machine, and its cash hoard recently hit $325 billion. As my colleague Matt Frankel pointed out, with that kind of money, Berkshire could buy some major companies with cash.

So what's going on with Berkshire and all that cash? Why isn't the company paying a dividend? Well, Buffett does love dividends: The stocks Berkshire owns pay it dividends of around $4.5 billion annually. But he has a long history of acquiring companies outright, and is likely still looking for additions to make to Berkshire. Spending some of the company's cash on dividends would limit his ability to do that.

That said, one day he or his successors may decide that they have more cash than Berkshire can deploy productively. At that point, they may initiate a dividend. Until then, shareholders can enjoy likely share-price appreciation over time, and when they need some income from the stock, they can sell some shares.

Buffett also rewards shareholders another way -- by repurchasing and essentially retiring shares of Berkshire, leaving each remaining share worth more. In general, Buffett prefers buybacks, as long as they're executed when shares are undervalued. Buybacks reward all shareholders, without delivering a taxable cash payout.

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Selena Maranjian has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.