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Berkshire Hathaway's (NYSE: BRK-B ) Warren Buffett is widely regarded as the greatest investor of our time. But most people don't realize that dividend investing makes up a large part of his investments. Some of his most sizable holdings pay big yields, which gives the Oracle of Omaha cash to invest in good times and in bad.
Owning dividend companies is a hallmark of Buffett's. They fall straight in line with his strategy of owning fundamentally strong companies whose business models provide inherent advantages against competitors -- otherwise known as "moats." Such companies can consistently reinvest cash flow at high rates of return (as revealed through strong returns on equity) and pay out excess cash flow to shareholders as dividends. Only fundamentally robust and well-managed companies can afford to give their shareholders cash every year.
In which companies does Buffett invest? Well, since Buffett has more than $100 million in assets under management, he's required to detail his equity portfolio in a document filed with the SEC. Publicly available through the SEC's EDGAR website, this 13-F form lets us see his holdings.
Here are Buffett's highest yielders:
Return On Equity (TTM)
|GlaxoSmithKline (NYSE: GSK )||5.2%||41.4%|
|Kraft (NYSE: KFT )||3.7%||9.3%|
|Johnson & Johnson (NYSE: JNJ )||3.5%||25.3%|
|ConocoPhilips (NYSE: COP )||3.3%||16.9%|
|Procter & Gamble (NYSE: PG )||3.0%||17.0%|
|Coca-Cola (NYSE: KO )||2.8%||29.2%|
|United Parcel Service||2.6%||40.5%|
Source: Yahoo! Finance.
Let's take a closer look at what's on the list.
Buffett bought GlaxoSmithKline, Sanofi-Aventis, and Johnson & Johnson as concerns grew over their dwindling drug pipelines. Their cash hoards, distribution networks, and experience working with the FDA are invaluable moats, allowing them to ward off new upstarts and continually post large profits.
Buffett has sold a chunk -- but not all -- of what he has called "a major mistake of commission": his investment in ConocoPhillips. He bought in before oil prices fell in 2008. While ConocoPhillips shares have risen in the past year, they remain far below the levels they reached in 2007 and 2008.
Buffett has been slowly selling shares of both Kraft and Procter & Gamble. Ever since Kraft acquired Cadbury over Buffett's protest, the Oracle's been whittling down his stake in the processed-food giant. With Procter & Gamble, his motives for selling are thus far unclear.
Motley Fool Pro also owns shares of Procter & Gamble, which our team believes may be the best consumer-staples company in the world. (International markets make up 60% of P&G's sales.) P&G boasts many of the most recognizable household brands, and it's paid a dividend every year since 1890 without interruption.
Coca-Cola makes up nearly 20% of Buffett's equity holdings, and the soda syrup sultan has been paying out increasing dividends for years. From its dividends alone, Buffett now earns one-third of his original investment in this longtime holding each year!
Your next step
In each case, Buffett's dividend-paying stocks are strong companies with wide moats, allowing them to pay dividends for years. If you hold on to strong dividend companies for years, you, too, can turn an initial investment into a small fortune.
Like Buffett, Jeff Fisher and the experts on the Motley Fool Pro team are focused on fundamentally strong companies that return value to shareholders year after year. These include GlaxoSmithKline and Procter & Gamble, both of which the service holds in its $1.4 million real-money portfolio. The team scours the market to find dividend stocks and other investments that perform well even in a volatile market. Then they take their strategy one step further, using tools like options to pick up investments at bargain prices, or produce income even as stock prices stagnate.
If you'd like to learn more about the other strategies our Pro team is using to grow their portfolio, simply enter your email address in the box below. They'll be happy to send you "5 Pro Strategies for 2011," a free report with all the details on how you can begin putting these strategies to use in your own portfolio.