4 Dividend Stocks Warren Buffett Loves

Enjoy that wimpy interest rate from your bank account? Of course not, and billionaire Warren Buffett doesn't care for those paltry rates, either. I've dug through Berkshire Hathaway's portfolio and found some high-quality companies paying dividends that make your checking account look weak. Some of these stocks are hand-picked current or former picks by the Oracle himself, while Intel (Nasdaq: INTC  ) is the handiwork of Buffett heir apparent Todd Combs.

In any case, they're all great companies with defensible moats trading at attractive prices and spinning off dividends. Let's look at a few.

The contenders and their yields

Coca-Cola (NYSE: KO  )   2.8%
General Electric (NYSE: GE  )   4%
Intel 3.6%
Johnson & Johnson (NYSE: JNJ  ) 3.6%

Source: AOL Daily Finance.

Each of these contenders has a nice dividend yield above the average yield of the S&P 500, 2.57%. Let's now look at each of these companies' dividend histories, payout ratios, free cash flow-to-payout ratio, and their ability to grow through capital appreciation.

Dividend history

Coca-Cola 49 years
General Electric 49 years
Intel 19 years
Johnson & Johnson 49 years

Source: divdata.com.

Each of these companies has a strong history of paying dividends. This is a healthy sign when looking at dividend stocks. Although it doesn't necessarily indicate how the company will operate in the future, it at least shows the companies' commitment to distributing cash to its shareholders and their ability to pay a dividend going forward.

Payout ratio
We next take a look at what these four stocks do with their money. This indicates what percentage they pay out to shareholders as dividends versus how much they reinvest into the company.

Coca-Cola 54%
General Electric 48%
Intel 32%
Johnson & Johnson 54%

Source: AOL Daily Finance.

I like to see the payout ratio below 80%. Each of these companies clears that hurdle, so all is good here.

Capital appreciation
Dividends are great, but they're only one component of returns. Investors also should seek strong capital appreciation through share-price growth. Let's take a peek at each company's compound annual growth rates when factoring in both dividends and share-price growth:

Compound annual growth rate over past 5 years, including dividends

Coca-Cola 9.6%
General Electric (10.9%)
Intel 6.7%
Johnson & Johnson 2.5%

You've heard it said that past performance isn't an indicator of future success. However, aside from General Electric, which saw its share price inflated during the financial bubble, the other companies on the list have managed to provide consistent returns. Coca-Cola in particular has seen great growth as it continues expanding its product lines and increasing its sales by selling into emerging markets.

Summary
Each of these dividend stocks has good yields, strong histories of paying dividends to shareholders, and healthy payout ratios. Where the companies differentiate themselves, in our analysis, is in the capital-appreciation area of our screen, where Coca-Cola takes the win.

Looking forward, Coca-Cola should continue to be a reliable yet strong performer. Nothing flashy, but an ironclad brand with plenty of room for expansion -- just the kind of qualities Buffett loves.

If you're on the quest for more dividend ideas, don't miss The Motley Fool's brand-new special free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks" which features 11 dividend stocks hand-picked by Fool analysts. Hundreds of thousands have requested access to our dividend special free reports, and now you can access it today at no cost. To get instant access to the names of these 11 high-yielders, simply click here -- it's free.

Chris Bledsoe owns shares of Berkshire Hathaway. The Motley Fool owns shares of Intel, Johnson & Johnson, Berkshire Hathaway, and Coca-Cola and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Coca-Cola, Berkshire Hathaway, and Intel, creating a bull call spread position in Intel, and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 02, 2012, at 9:01 AM, eliink wrote:

    JNJ has increased its dividend for the last 49 years.. not the last 41 years.

    http://www.investor.jnj.com/releasedetail.cfm?ReleaseID=5728...

  • Report this Comment On January 03, 2012, at 9:31 AM, TMFKris wrote:

    @eliink: The error has been fixed. Thanks for pointing it out.

    TMFKris -- TMF copy editor

  • Report this Comment On January 03, 2012, at 2:13 PM, buffalonate wrote:

    Warren Buffett didn't invest in Intel. He only takes positions of 1 billion or larger and the Intel position is only 200 million. The media keeps saying that those smaller positions made by his newly hired stock pickers are Buffett's. Buffett has stated over and over that he only takes positions larger than 1 billion. You would think if they Fool was going to write an article about Buffett they might know what they are talking about but I guess not.

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