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3 Dividend Stocks Warren Buffett Would Approve Of

By David Jagielski - Jan 14, 2020 at 8:30AM

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These value investments could look great in any portfolio.

Warren Buffett is an icon in the investing world and many investors try to mimic his strategy when picking stocks. With a focus on value and dividends, Buffett's investing approach is well suited for conservative, long-term investors who have a lot of patience. The three stocks listed below are all picks that are in accordance with his line of thinking: They have strong businesses, pay dividends, and are reasonably valued.

1. National HealthCare

National HealthCare (NHC -0.94%) provides nursing facilities for patients and seniors in need of care. The company offers a wide range of services, including rehabilitation services, nutrition services, and occupational therapy. It has locations in 10 states and with 75 skilled nursing centers and 24 assisted living communities, the company is in a great position to take advantage of an aging demographic in the U.S.

Not only does the company have a solid business that's likely to continue to grow, but it's also a great deal as well. The stock would appeal to a value investor like Buffett as it trades at a very reasonable 18 times earnings and just 1.7 times its book value.

Cash falling from the sky.

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Plus, it pays a dividend of $0.52 every quarter, which currently yields a payout of 2.4% annually. The company has also increased its dividends over the years. Five years ago, the stock was paying $0.34. Those payouts have increased 53% since then, averaging a compounded annual growth rate (CAGR) of 8.9%.

2. Wells Fargo

Wells Fargo (WFC -3.32%) is already one of Buffett's stocks, as the big bank has proven over the years that it is a stable buy. For all the controversy and bad press that has surrounded the stock in recent years, including the creation of fake accounts, it has continued to do well and produce strong numbers. Profits remain strong for Wells Fargo -- over the past four quarters its net income has totaled $22 billion, and the company has finished each of the past three years within $1 billion of that mark.

Predictability in earnings is important for Buffett, as is valuation. And like National HealthCare, Wells Fargo trades at some appealing multiples as well. At a price-to-earnings (P/E) ratio of 11 and a price-to-book (P/B) ratio of 1.3, it's an even better value buy than National HealthCare. Its dividend yield of 3.9% is also higher, and the company's quarterly payments of $0.51 have risen 46% from the $0.35 payouts that investors were receiving five years ago, for a CAGR of 7.8%. 

3. Suncor

Suncor Energy (SU -1.49%) may be the riskiest stock on this list if only because the Canadian-based energy company has exposure to the volatile oil and gas industry. However, that doesn't mean the stock isn't a stable pick, as it's posted a profit in each of the past three years, even as oil prices have fluctuated and as many companies struggle to stay out of the red. In the trailing twelve months, Suncor has recorded a net income of 5 billion Canadian dollars.

This is also a stock that Buffett invests in and it's easy to see why: It offers stability, predictability, and dividend income. Suncor's P/E of 14 and P/B of 1.5 falls within a reasonable range for value-oriented investors and it also offers a very attractive dividend which is yielding 3.8% today. Currently, the company pays a quarterly dividend of CA$0.42 and that's risen 50% from the CA$0.28 that it was distributing five years ago. That's good for a CAGR of 8.4%.

Why not buy all three?

Putting all three of the stocks listed above in your portfolio can be a terrific way to diversify your holdings while also providing you with solid pillars for building a dividend empire . All three pay more than the 1.85% dividend that investors can expect from the average S&P 500 stock and they're also likely to continue increasing their payouts for the foreseeable future. And with cheap valuations, these stocks can also generate capital gains for investors as well, giving you the best of both worlds.

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Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
$42.26 (-3.32%) $-1.45
Suncor Energy Inc. Stock Quote
Suncor Energy Inc.
$37.78 (-1.49%) $0.57
National HealthCare Corporation Stock Quote
National HealthCare Corporation
$69.49 (-0.94%) $0.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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