Warren Buffett has spent decades beating the market by focusing on fundamentally sound businesses. The strategy has been a long-term winner. However, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) actually underperformed the S&P 500 over the last 10 years -- mostly because it didn't own many of the technology stocks that accounted for much of the market's gain.

Now 90 years old, Buffett knows he'll eventually have to pass the torch to his successors, so he's been trying out some of their ideas. The big winner has been Apple, which now accounts for 38% of Berkshire's portfolio. Berkshire has added other tech stocks as well, such as Snowflake and StoneCo, which deviate heavily from the way Buffett is known to invest.

Despite these new companies, the vast majority of Berkshire's holdings are in dividend stocks, mostly in the financial and consumer staples sectors. However, only five of the 49 securities that Berkshire holds are Dividend Aristocrats -- members of the S&P 500 that have raised their dividends for at least 25 consecutive years. They are Coca-Cola (NYSE:KO), Chevron (NYSE:CVX), AbbVie (NYSE:ABBV), Johnson & Johnson (NYSE:JNJ), and Procter & Gamble (NYSE:PG). Here's what to buy and which ones to pass on.

Warren Buffett, 
CEO of Berkshire Hathaway.

Image source: The Motley Fool.

1. Coca-Cola

Berkshire Hathaway Portfolio Stats 

Value: $21.47 billion

Allocation: 7.1%

Rank: 4/49 securities

Dividend Yield: 3.1%

Buffett has owned Coca-Cola for what seems like forever, but that doesn't necessarily mean you should go out and buy shares of America's largest beverage company. The pandemic took a toll on Coke's top and bottom line, which is understandable considering many of the restaurants, resorts, and entertainment venues that sell its products were closed. However, the company's performance was on a downtrend even before the pandemic.

KO Revenue (Annual) Chart

KO Revenue (Annual) data by YCharts

Shifting consumer behaviors away from soda toward healthier options paired with limited growth avenues makes Coke's trajectory uncertain. Management is guiding for around $2.15 in 2021 non-GAAP earnings per share (EPS), which would give it a forward P/E ratio around 25. That's not exactly cheap for a slow grower. The only thing really going for Coke is its stable and growing payout. The company is guiding for non-GAAP 2021 free cash flow (FCF) of $8.5 billion, which is more than enough to cover its $7.1 billion in dividend obligations. Coke is likely to continue distributing the majority of its FCF as a dividend payment. But given Coke's valuation and shaky performance, it's best to steer clear unless its price comes down significantly.

2. Chevron

Berkshire Hathaway Portfolio Stats 

Value: $4.99 billion

Allocation: 1.6%

Rank: 10/49 securities

Dividend Yield: 5%

The energy sector is full of risky companies and high-yield dividend stocks that are riddled with debt. But it's also one of the best sectors to find value. Buffett is well aware of this opportunity. And although Berkshire owns just two energy stocks, Chevron and Suncor Energy, it also owns 91.1% of Berkshire Hathaway Energy, which has over $100 billion in assets.

Chevron has Buffett written all over it. After an expansion period of high spending and mounting debt, Chevron has spent the last five years decreasing its spending and improving its balance sheet. It has arguably the best balance sheet of the oil majors and can sustain its current oil and gas production without outlaying too much capital. This provides advantages over bulkier majors like ExxonMobil. With WTI oil prices above $60 a barrel, Chevron is well-positioned to have a nice recovery and continue raising its dividend, which currently yields 5%.

3. AbbVie

Berkshire Hathaway Portfolio Stats 

Value: $2.76 billion

Allocation: 0.9%

Rank: 15/49 securities

Dividend Yield: 4.6%

AbbVie was spun off from Abbott Laboratories in 2013 and has raised its dividend ever since. And because Abbott was a Dividend Aristocrat in 2013 (and continues to be today), that makes AbbVie one as well.

Buffett has been increasingly looking at the healthcare industry for value and dividends. AbbVie's 4.8% dividend yield and low valuation are right up Buffett's alley. It generated $10.56 billion in 2020 adjusted diluted EPS, giving it an adjusted P/E ratio of just 10. It's also guiding for around $12.42 in adjusted diluted 2021 EPS. The only real danger with AbbVie is its concentrated drug portfolio. 43% of 2020 revenue came from Humira, the leading prescription medicine used to treat Crohn's disease. Humira's revenue is expected to decline in the coming years, so AbbVie is developing new drugs to help offset that revenue loss. AbbVie isn't without its risks, but it seems like a reasonable value right now.

4. Johnson & Johnson (J&J)

Berkshire Hathaway Portfolio Stats 

Value: $53.1 million

Allocation: 0.02%

Rank: 42/49 securities

Dividend Yield: 2.5%

J&J made headlines last week after its COVID-19 vaccine was suspended due to reports of severe blood clots. It's the latest hiccup in the company's vaccine rollout, which was already lagging behind Pfizer and Moderna. However, J&J's success doesn't depend on the vaccine. Far from it. J&J is a massive healthcare behemoth that generates sales from three core segments -- pharmaceuticals, medical devices, and consumer goods. This reach gives it diverse revenue streams unlike AbbVie, which is a pure-play pharmaceutical company. J&J has generated steady results throughout market cycles. So, although the vaccine delays may be giving J&J a headache, it's got Tylenol and a slew of other brand products to back it up.

J&J is similar to Coca-Cola in that it isn't necessarily cheap, it isn't growing quickly, but it has the size and track record that dividend investors love. Chevron and AbbVie seem better positioned at this time, but it's hard to go wrong with J&J.

5. Procter & Gamble (P&G)

Berkshire Hathaway Portfolio Stats 

Value: $43.3 million

Allocation: 0.01%

Rank: 43/49 securities

Dividend Yield: 2.3%

What does P&G have in common with Coke and J&J? All three companies are the largest U.S.-traded stocks by market cap in their respective industries. And all three have raised their dividends for 57 consecutive years. P&G is the quintessential recession-proof stock. Demand for its products is relatively insulated from market cycles. However, P&G is arguably a better consumer staple investment than Coke. Unlike Coke, it was able to grow revenue and earnings in 2020 and plans on growing its organic sales further to cap off fiscal year 2021 (FY 2021). P&G is also a cheaper stock, trading at a P/E ratio of 26 compared to Coke's 30. And finally, P&G generates nearly twice the FCF needed to cover its dividend. Given its entrenched position and track record for stable low to mid-single-digit growth, P&G is the safest Dividend Aristocrat on this list and arguably a better buy than Coke or J&J.

A final takeaway

With the market at an all-time high, dividend stocks that yield over 3%, let alone 2%, are increasingly harder to come by. The average stock in the S&P 500 yields just 1.3%, the lowest level in 10 years.

KO Dividend Yield Chart

KO Dividend Yield data by YCharts

Despite growth and valuation concerns, each Dividend Aristocrat that Berkshire owns deserves recognition for yielding over 2%. However, inflation is now 2.6%. Investors and retirees looking to generate income that exceeds inflation could consider Chevron or AbbVie.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.