Dividend Stocks Usually Beat Non-Payers. Berkshire Hathaway Is the Exception.

Dividend stocks have absolutely crushed non-payers over the last 50+ years, delivering an average annual total return of 9.2% compared to 4.2%, according to data from Ned Davis Research and Hartford Funds. However, there are some notable outliers, including Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB), which has notoriously avoided paying dividends. It has delivered an average annual return of 19.9% since Warren Buffett took it over in 1965.

Here's a look at what has made Berkshire Hathaway such an outlier.

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Dividends drive real returns

Many investors see dividends as investments suitable only for retirees. However, the actual data on dividends tells an entirely different story. Since 1940, roughly a third of the S&P 500's total return has come from dividend reinvestment, according to data from Morningstar and Hartford Funds. While that has fallen to around a mid-teens percentage in recent years as companies started to deemphasize dividend payments in the 1990s, dividends remain meaningful contributors to the index's total return.

Digging a little deeper into the data shows that dividend stocks not only deliver higher total returns than non-payers but also have much lower volatility. For example, dividend stocks have had a standard deviation of 16.7% since 1973 (standard deviation is a statistical measure of market volatility that shows how widely prices range from the average). Non-payers, on the other hand, had a much higher standard deviation of 21.9%. Meanwhile, companies that have initiated and grown their dividends have performed even better. They've delivered a 10.2% average annual total return with a lower standard deviation of 16%.

Put simply, dividend stocks tend to be higher-returning and less volatile, which is an ideal combination.

Berkshire Hathaway: The dividend outlier

Berkshire Hathaway has paid one dividend (in 1967) since Warren Buffett took control of the former textile company in 1965. Buffett famously joked that he must have been in the bathroom when the board made that decision. Despite the lack of a dividend payment, Berkshire has been a long-term outperformer (19.9% average annual return compared to 10.4% for the S&P 500 from 1965 to 2025).

Warren Buffett had a simple reason for not paying dividends to Berkshire Hathaway shareholders through most of his tenure as CEO. He firmly believed that reinvesting retained earnings would create more long-term value than a shareholder would have gained by receiving a dividend and reinvesting it in additional Berkshire shares after taxes.

That's due to Buffett's confidence in his ability to allocate capital at high rates of return, thanks in part to the diversification of Berkshire, which became a holding company rather than an operating company. That's an important distinction that not all dividend non-payers share. Berkshire had an investment-focused CEO and broad reinvestment opportunities.

Most companies that don't pay a dividend do so out of necessity. They need the cash to reinvest in their business. As the business matures, it has two options for excess cash: fund expansion into new businesses or return it to shareholders (dividends or buybacks). Many companies have run into trouble by making acquisitions outside their core areas of expertise because operating CEOs run the business, not capital allocators. They can get into the trap of growing just to grow or empire-building. Contrast that with Warren Buffett's disciplined, value-focused investment approach. He focused on investment returns rather than putting cash to work because it was burning a hole in his pocket or because investors were pressing him to do something with their capital.

Berkshire is the exception because it's exceptional at allocating capital

Most non-dividend payers underperform over the long term because they're either burning through cash to grow and eventually run out of money, or they mismanage their cash flow as they mature. Companies that initiate a dividend tend to treat it as a payment owed to shareholders that they need to grow, which drives their focus on increasing earnings per share. Buffett has never needed this extra incentive because he's always been an investment-return-focused capital allocator.

What will be interesting going forward is whether his replacement, Greg Abel, shares the same mindset, especially given that Berkshire built up a massive cash position ($365.5 billion at the end of the second quarter). He's already started allocating some of that capital since taking over as CEO, including buying back stock, increasing Berkshire's investment portfolio, and buying homebuilder Taylor Morrison. As long as Abel can find high-return investments, Berkshire should remain an outlier as a rare long-term value creator that doesn't pay a growing dividend.

Matt DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.