Investors heed Buffett warning as market valuations hit record highs

Warren Buffett advises being fearful when others are greedy

Investors are managing dividend portfolios using Warren Buffett’s strategy of being fearful when others are greedy. Buffett wrote this rule in his 1986 Berkshire Hathaway shareholder letter.

Matt DiLallo holds positions in Berkshire Hathaway and Coca-Cola.

Investors pause dividend reinvestment to build cash

Dividend investors are building cash by pausing new purchases at stretched valuations. They are specifically halting automatic dividend reinvestment for stocks trading at high prices.

The guidance advises investors to stop buying shares when current yields are well below a stock’s historical yield. This discipline ensures that a future market decline is seen as a buying opportunity rather than a cause for fear.

Investors are holding these payouts as cash to use when prices become attractive.

Watch lists target high-quality dividend stocks

Investors are compiling watch lists of five to eight high-quality dividend-paying companies to buy at lower prices if a crash occurs. They calculate target prices by dividing the annual dividend by a desired yield.

For example, an investor seeking a 3% yield from Coca-Cola’s $2.12 annual dividend would set a target price of about $71. This target is roughly 25% below the recent trading price of $96.

Dividend Aristocrats show historical resilience in crashes

During the dot-com bubble, the S&P 500 fell 47% over two years, while the S&P 500 Dividend Aristocrats gained 4.7%. This performance outperformed the broader market by 51.4%.

The Dividend Aristocrats fell 47.2% during the global financial crisis, while the S&P 500 dropped 55%. During the 2020 COVID-19 market crash, the Dividend Aristocrats underperformed the S&P 500 by 1.4%.

Legal & General maintains attractive yields despite market risks

Dividend investors continue to view income as appealing despite current market concerns.

Legal & General, listed on the London Stock Exchange (LSE: LGEN), has a trailing dividend yield of 7.15%.

Shares in the company rose 28% over the past year, providing a total return of 35% when including dividends. The stock currently trades at a forward price-to-earnings ratio of 7.85.

Asset management profits remained flat that year, while the Solvency II coverage ratio dropped from 232% to 210%.

A potential stock market crash caused by an AI bubble could negatively impact Legal & General by reducing assets under management, which would hit fees and investor confidence.

Competitor Aviva reported a 25% increase in operating profit during 2025.

Long-term growth potential of recommended stocks

An investment of $1,000 in Netflix on December 17, 2004, would have grown to $341,966.

A $1,000 investment in the company on April 15, 2005, would have grown to $1,146,819.

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