Warren Buffett, CEO of Berkshire Hathaway (BRK.A 1.66%) (BRK.B 1.71%), is in a class of his own when it comes to investing. Since taking the helm at Berkshire Hathaway in the mid-1960s, he's delivered an average annual return of 20% for holders of its Class A shares. In aggregate, we're talking about a nominal gain of more than 2,800,000%, as well as the creation of more than $500 billion in value for investors.
While there are a number of factors that have made Buffett an investing legend, perhaps the most overlooked reasons he's so successful are dividend stocks. The Oracle of Omaha absolutely loves brand-name, time-tested companies that consistently pay a dividend. This year alone, Berkshire is expected to collect over $4.3 billion in dividend income.
Although more than half of the four dozen stocks held by Berkshire Hathaway pay a dividend, the following three companies are the highest-yielding Buffett stocks.
Chevron: 4.9% yield
Warren Buffett and his investing team bought a handful of new stocks for Berkshire's portfolio in the fourth quarter of 2020, but none boasts a higher dividend yield than oil and gas giant Chevron (CVX 0.14%). Even with inflation rising, the nearly 5% yield shareholders are receiving is netting them a real-money return.
What's intriguing about Chevron is the company's prudently managed balance sheet. Whereas most oil companies found themselves overleveraged during the pandemic, Chevron's reasonably low 34% debt-to-equity ratio gave it far more financial leeway than its peers. It obviously doesn't hurt that Chevron has been mindful of its capital expenditures, too. It is outlaying $14 billion in capex in 2021, which is down from a pre-pandemic forecast of $19 billion to $22 billion a year between 2021 and 2024.
The integrated structure of Chevron's operating model also ensures that it's somewhat hedged against inevitable downturns. While it'll always generate more profits from its upstream drilling operations, the company's petrochemical plants and refineries help it hedge against a drop in oil prices (lower oil prices tend to boost consumer demand for petrol products).
Chevron should benefit from higher oil prices as the U.S. and global economies rebound from pandemic lows. Then again, the company also needs to think about investing in renewable energy at some point in the future, which could eventually weigh on dividend growth.
AbbVie: 4.5% yield
Although healthcare companies aren't typically known for their dividends, pharmaceutical stocks tend to be the one exception. Brand-name drug giant AbbVie (ABBV 0.37%), which was first added to Berkshire's portfolio in the third quarter of 2020, currently boasts a juicy annual yield of 4.5%.
Investors won't have to dig deep to discover what's driving AbbVie's cash flow and its market-topping yield. Anti-inflammatory drug Humira, which has 10 approved indications in the U.S., is the world's best-selling drug by annual sales. In just the first quarter of 2021, Humira brought in almost $4.9 billion worldwide, which puts it on track to nearly hit $20 billion in sales this year. As a brand-name drug with high margins and substantial pricing power, Humira has been a cash cow that's led the way for AbbVie's superior dividend.
The bad news is that Humira will begin facing biosimilar competition in the U.S. in 2023. Though sales won't fall off a cliff, a decline is expected. As a result, AbbVie has been taking steps to ensure long-term growth and the continuation of its dividend.
The biggest moves AbbVie has made thus far is the cash-and-stock acquisition of Allergan in 2020, which added a new line of therapeutics to its portfolio and will result in more than $2 billion in cost synergies. In particular, this deal brought Botox into the fold.
Botox has both neuroscience and aesthetic applications. In the first quarter, combined sales for Botox came in just above $1 billion, with sales for aesthetic Botox rising 45% worldwide. AbbVie will more than likely remain a cash cow for years to come.
Verizon Communications: 4.4% yield
In the veritable blink of an eye (six months), telecom giant Verizon (VZ 0.83%) has become Berkshire Hathaway's sixth-largest holding. If you're wondering why Buffett and his team suddenly scooped up 158.8 million shares of Verizon, look no further than its 4.4% yield. Given the low volatility of its shares and inflation-topping yield, Verizon is a smart place for Berkshire's cash.
There's no question that Verizon operates what can be accurately dubbed a "boring" business. However, boring businesses are often very profitable, and Verizon is on the cusp of recognizing modest organic growth from two catalysts.
To begin with, Verizon will benefit from the rollout of 5G infrastructure. Though upgrading wireless infrastructure won't be cheap or happen overnight, the payoff will be well worth it. It's been a decade since wireless download speeds were last improved, suggesting there will be a multiyear technology upgrade cycle. Since Verizon's wireless segment generates its juiciest margins from data consumption, going to 5G should be an organic boom to its bottom line.
Secondly, investments in mid-band spectrum could allow Verizon to expand fixed wireless-access broadband to as many as 30 million homes by 2023. Suffice it to say, Verizon's payout is rock-solid.