Berkshire Hathaway CEO, Warren Buffett. Image source: The Motley Fool.
Warren Buffett, the CEO of conglomerate Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%), which owns more than 60 subsidiaries, is arguably the world's most-renowned investor. Over a span of six-plus decades, he built up his net worth from less than $10,000 to more than $66 billion, based on real-time data from Forbes as of June 16, 2016.
On top of profits earned by Berkshire's many subsidiaries, Buffett's conglomerate benefits from long-term investments in the stock market. Buffett is a firm believer that high-quality companies tend to increase in value over time, and the bets that he, sidekick Charlie Munger, and his investment team, place are often based on a multi-year, or multi-decade time horizon.
One of the keen strategies Buffett uses when investing for the long term is seeking out dividend stocks. Dividends, by nature, tend to be paid by businesses with proven track records that have stable long-term outlooks, thus providing the peace of mind that the Oracle of Omaha is often looking for in an investment. Dividends can also act as a hedge in a falling stock market, and can be reinvested into more shares of stock in a strategy known as compounding. This can result in owning more shares of stock, and receiving even bigger dividend payouts in a repeating cycle.
Out of the 45 separate companies/share classes currently held in Berkshire Hathaway's portfolio as of its latest 13F filing in mid-May, three companies stand out as being in the high-yield dividend category. What represents a "high-yield dividend?" While arbitrary, a high-yield dividend is generally considered to be a stock yielding 4% or higher, or essentially double what the broad-based S&P 500 is paying out. Based on Berkshire's current holdings, here are the high-yield dividend stock Buffett has chosen to buy.
Baojun 560. Image source: General Motors.
General Motors: 5.2% dividend yield
Topping the list of Buffett's favorite high-yield dividend stocks is automaker General Motors (GM 4.37%), with a current yield of 5.2%. The 50-million shares that Berkshire Hathaway currently owns is enough to give Buffet a 3.2% stake in GM.
What does Warren Buffett see in General Motors? My bet is it's the automaker's long-tail growth opportunity in China, and more modest growth opportunities in the U.S. and Europe. For example, Warren Buffett has suggested on numerous occasions that the value of American businesses (as a whole) tends to increase because global GDP rises over long periods of time. This would, in a very-simplistic manner, bode well for General Motors, which relies on a growing U.S. and global economy to drive new-vehicle purchases.
But China's growing middle class, and the expectation of a burgeoning middle class in Southeast Asia, India, and even Africa, gives hope to GM that it'll be able to translate its success in the U.S. and Europe into these markets, as well. General Motors will look to do this by focusing on affordability, providing improvements in fuel efficiency, and offer in-cabin luxuries, such as infotainment systems, which can rapidly boost margins.
Surprisingly, GM's biggest success story in China hasn't been its sedans, but its SUVs The Baojun 560 quickly became one of the top-selling SUVs in China just months after its launch. SUVs typically have better margins than sedans for automakers, so this is good news all around for GM and its shareholders.
Wall Street seems to have written off the automakers for the time being, with China's GDP growth rate shrinking; but GM's forward P/E of five is getting difficult to ignore.
Image source: Getty Images.
Verizon Communications: 4.3% dividend yield
Buffett and his investment team are also big fans of telecom giant Verizon Communications (VZ 2.85%), which is sporting a 4.2% yield. Berkshire Hathaway owned just a hair over 15 million shares of Verizon as of the end of the first quarter, which is worth about $802 million. I suspect there are two main reasons why Buffett sticks with Verizon: the high barrier of entry in the wireless industry, and the juicy margins associated with the industry.
Within the U.S., there are really only four telecom companies that dominate the wireless scene, and only Verizon and AT&T have deep-enough pockets to invest billions upon billions annually in upgrading their infrastructures and data networks to meet the growing data demands of the American public. It would take an incredible amount of capital and a long period of time for any new entrant to gather the wireless following that these two telecom giants possess. To that end, this high barrier to entry helps to preserve Verizon's wireless market share, and it makes the company's cash flow somewhat predictable on an annual basis.
Because there are so few wireless choices for the consumer, Verizon also possesses substantial pricing power with its data plans. Although the company ditched cellphone contracts last year, it's had absolutely no problem keeping consumers loyal to the brand. In the first quarter, the company's wireless churn rate dipped below 1%, meaning it's losing very few customers to its competitors.
With a "steady as she goes" business model, Verizon is the perfect example of a high-yield Buffett stock.
Image source: Getty Images.
Sanofi: 4.2% dividend yield
While known for his penchant to tread lightly around healthcare companies, Warren Buffett also owns shares of French drugmaker Sanofi (SNY 1.15%), which is currently yielding 4.2%. As of the end of Q1 2016, Berkshire Hathaway owned a little over 3.9 million shares of Sanofi, worth about $150 million.
On one hand, the danger of investing in pharmaceutical giants is that they'll eventually encounter the patent cliff. In Sanofi's case, it's been dealing with declining sales for Plavix, Allegra, and Lovenox, to name a few. However, there are plenty of growth channels within Sanofi's product portfolio.
For example, Sanofi sold $726 million worth of rare-disease drugs during the first quarter, an 8.5% increase from the year-ago quarter. Although rare diseases have limited patient pools, they're also usually devoid of competition. This gives Sanofi the ability to boost pricing to match or exceed the rate of inflation. The company also possesses strong pricing power with its rapidly growing multiple sclerosis product, and its vaccine segment.
Sanofi also intends to spread its wings, and grow via collaborations. Sanofi has partnered with Regeneron Pharmaceuticals to bring Praluent to market, a PCSK9 inhibitor that's designed to dramatically lower low-density lipoprotein cholesterol, or LDL-C, the bad kind of cholesterol.
This next-generation injectable medicine is a lot more expensive than traditional cholesterol-reducing medicines, but the results of Sanofi's and Regeneron's long-term cardiovascular outcome study could go a long way to justifying its $14,600 annual cost, and boosting sales. At its peak, Praluent could easily be a $2 billion to $3 billion per year drug if the long-term CV data proves superior to the current standard of care.
As long as Sanofi remains innovative, Buffett, Berkshire, and shareholders are liable to reap the rewards.
