- Berkshire Hathaway B shares have failed to outperform peers over the past decade, partly due to the lack of dividends.
- Using derivatives to create synthetic dividends can boost returns and create compounding opportunities for Berkshire Hathaway shareholders.
- The company is undervalued and offers significant upside potential, making it a good investment option for long-term investors.
- The two strategies mentioned are only viable for investors with existing familiarity with derivatives and the Greeks.
This article discusses strategies for creating synthetic dividends on Berkshire Hathaway stock (BRK.B and BRK.A) to boost returns and achieve compounding opportunities for shareholders. The key points include:
- Lack of Dividends: Berkshire Hathaway, despite being a quality investment, does not pay dividends. Dividends play a crucial role in compounding wealth over time.
- Using Derivatives: The article suggests using derivatives to create synthetic dividends. Two strategies are outlined: one involving covered calls and another using a “wheel” strategy, which combines cash-secured puts and covered calls.
- Covered Calls: Investors can sell covered calls on their Berkshire shares, collecting premiums that act as a form of income. These premiums can be reinvested in Berkshire stock to compound returns.
- Wheel Strategy: The “wheel” strategy involves selling cash-secured puts to generate income and potentially acquire additional Berkshire shares at a lower cost. Once assigned, investors can then write covered calls on those shares.
- Benefits: These strategies aim to mimic the compounding effect of dividends without the company actually paying dividends. Over time, the number of shares owned can increase, boosting potential returns.
- Risks: Using derivatives, such as options, involves risks and requires knowledge of the options market. Risks include assignment, transaction costs, and tax implications. Investors should be familiar with options trading and their Greeks.
- Berkshire’s Valuation: The article suggests that Berkshire Hathaway is undervalued and offers significant upside potential, making it an attractive long-term investment.
- Risks to Berkshire: Potential risks to Berkshire include succession planning, exposure to underlying businesses, and macroeconomic weaknesses.
In summary, the strategies presented aim to create synthetic dividends for Berkshire Hathaway shareholders by using derivatives to generate income and potentially acquire more shares over time. These strategies require a good understanding of options and a long-term investment perspective.
