Berkshire Hathaway (BRK.A +1.46%)(BRK.B +1.12%) is a huge conglomerate with a market value of more than $1 trillion. To suggest that it is a very successful company would be an understatement. So, perhaps, it isn't shocking to hear the company's chief executive officer, Warren Buffett, explain that Berkshire Hathaway had a staggering $26.8 billion tax bill in 2024. However, if you read what Buffett said, there's also a powerful lesson for investors.
The origins of Berkshire Hathaway
The funny thing about Berkshire Hathaway is that Warren Buffett's investment in the company probably was one of his biggest investment mistakes. When Buffett bought the company it was a domestic clothing maker that looked cheaply priced. The only problem was that clothing was increasingly being made overseas and imported to the U.S. market at lower prices than it cost to produce those goods domestically.
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Berkshire Hathaway simply couldn't compete and its clothing operations eventually closed down. What Berkshire Hathaway became was a vessel that Buffett used to build a giant conglomerate that now has its fingers in everything from insurance to chemicals to utilities, and a huge amount in between. He got lemons and made some very tasty lemonade, to the financial benefit of many investors.
That success is highlighted by the $26.8 billion tax bill Berkshire Hathaway paid in 2024. According to Buffett that number represents about 5% of all of the corporate taxes collected by the U.S. government last year. That's a lot of money and, interestingly, Buffett attributes the figure to the fact that, "For sixty years, Berkshire shareholders endorsed continuous reinvestment and that enabled the company to build its taxable income."
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What Berkshire Hathaway has only done once
A big piece of that story is that Berkshire Hathaway doesn't pay a dividend. And has only ever paid one dividend under Buffett, way back in 1967. Since that payment the company has reinvested all of the money it earns. But Berkshire Hathaway has long owned stocks that do pay dividends, such as Coca-Cola and American Express, among many others.
What happened to the dividend payments collected along the way? They were reinvested, too. And that's where the lesson for individual investors comes into play. Buffett is actually doing something that you can easily do yourself. Just look at the charts below for Coca-Cola and American Express to see how powerful dividend reinvestment could be in your own portfolio over the long term.
Coca-Cola's stock price increase was 5,000%. But its total return, which assumes dividend reinvestment, was 12,800%. American Express' stock gain was 6,900%. It's total return with dividends reinvested rocketed to 15,600%. This little bit of investment magic isn't exclusive to stocks. It works for index-based exchange-traded funds (ETFs), too.
The chart above shows the price-only gain for SPDR S&P 500 ETF Trust, the oldest ETF in existence, to be roughly 1,100% since its inception. But reinvesting the dividends brings the total return to more than 2,100%. This may look like alchemy, but it really isn't. It is simple math.
You can make Buffett's math work for you
Essentially, when you reinvest your dividends you are buying more shares of the stock you own. Those new shares increase the size of your investment and generate dividends of their own. Do this long enough and things start to snowball, turning what seem like small dividend payments into a huge performance boost over time.
Berkshire Hathaway buys individual stocks and entire companies, so what he's doing isn't exactly the same as dividend reinvestment. But the theme is identical and you can follow his lead with a simple phone call to your broker or a click of your mouse on your broker's website. Setting up dividend reinvestment can help your money work harder for you, which is the real lesson from Berkshire Hathaway's gigantic 2024 tax bill.
