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Fool Canada’s first 1,000%+ winner?

Our Chief Investment Advisor, Iain Butler, and a team of The Motley Fool’s most talented investors from across the globe recently embarked on an unprecedented mission:

To identify the 20 Canadian small-cap companies they believe have the best shot at earning investors like you gains of 1,000%+ over the coming years.

For the next few days only, you can get the names and full details on these 20 potential “10-baggers” when you join Iain and his team in a first-of-its-kind project they have dubbed Discovery Canada 2017.

Is Warren Buffett a Secret Income Investor?

A lot has been written about Warren Buffett’s investment style. That’s unsurprising, since he is the most successful investor of all time. We know that a key part of his investment style is seeking stocks which trade at fair prices given their outlooks. Furthermore, Buffett seeks a wide margin of safety when investing and goes on to hold for the very long term. However, does he also seek stocks which offer strong income prospects, too?

Investment potential

During the course of his investment career, Warren Buffett has been asked about his take on dividends several times. His response has been relatively straightforward in so far as he likes to receive dividends from his investments, but only under very specific circumstances.

Those circumstances are where the company in question is unable to deliver a sufficiently high return on reinvested capital. In other words, if a company can make $1 in profit and reinvest it for future growth in order to generate more than $1 in earnings, Buffett would rather the company held on to its cash as opposed to paying it to shareholders.

Similarly, if a company is unable to generate a return on its own reinvested capital, Buffett has stated that he would rather the company paid it out to investors in order for them to invest it elsewhere.

Logical standpoint

This viewpoint is entirely logical. It focuses on being efficient with capital and means that profits from a business will always be invested in the way which offers the best long-term returns.

Investors seeking to emulate Buffett’s logical standpoint can do so relatively easily. They can buy shares in companies which either pay out the vast majority of their profit as a dividend, or else buy stocks which are able to generate a high return on capital. Both options put the onus on the investor to find companies which can generate high returns in order to provide an efficient allocation of capital.

Perhaps the one type of company which Buffett will seek to avoid is one which retains dividends and yet is unable to put them to profitable use. In other words, $1 reinvested does not offer a sufficiently high return to justify a reinvestment of capital. In such a scenario, the company should perhaps seek to pay out a higher proportion of its profit as a dividend.

Foolish takeaway

Warren Buffett seems to have a clear standpoint on dividends. In certain circumstances he favours them, while at other times he does not. This is perhaps to be expected from a man who has a ruthless focus on efficient capital allocation. And as his track record shows, his investment style has proven to be hugely successful over a long period of time.

Therefore, rather than investors simply looking at shares as ‘income’ or ‘growth’ stocks, it may be prudent to delve deeper and work out their return on capital. Doing so could help an investor to find the stocks with not only the most efficient capital allocation policies, but also those which may deliver the best returns in the long run.

36-Year Old CEO Bets Over $300 Million on 1 Stock

Iain Butler, Lead Adviser of Stock Advisor Canada, recommended this little tech darling to thousands of loyal members last March... and those that followed his advice are up 127.7% (they've already made 2X their money!).

Not to mention this tiny Eastern Ontario company has already been recommended by both Motley Fool co-founders, David and Tom Gardner, because of its amazing similarity to an "early stage" Amazon.

Find out why Tom Gardner was recently on BNN's Money Talk raving about this company, and how you can read all about it inside Stock Advisor Canada. Click here to unlock all the details about his Canadian rule breaker!

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to find out how you can claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

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