Warren Buffett's Berkshire Hathaway (BRK.A -0.42%) (BRK.B -0.56%) is notorious for letting opportunity come to it instead of chasing overpriced assets. After years of sitting on a massive pile of cash, Berkshire has flipped the switch and been on a buying spree over the last few months.
In March, it added to its stake in Occidental Petroleum (now its eighth-largest holding) and announced the acquisition of Alleghany, an insurance company. Last week, it reported an over $4.6 billion stake in HP.
Although investors may be tempted to go all-in on the stock market now that many stocks have sold off, a better approach could be to find some high-quality dividend stocks that have a track record of outlasting volatility and holding them for many years. Chevron (CVX 0.53%), United Parcel Service (UPS -0.14%), and Coca-Cola (KO -0.82%) stand out as three excellent companies to consider this spring. Here's why.
Chevron will help diversify a portfolio
Lee Samaha (Chevron): It's no secret that energy prices soared due to an escalation in the conflict in Ukraine, and unfortunately, predicting the end of the conflict is a fool's game. If those statements ring true, it makes sense to start looking at energy companies like Chevron.
Buying into an energy company makes sense due to the benefits of higher oil prices. And it also helps diversify the risk in your portfolio if you hold companies with substantive energy costs or other exposures. By the latter, I'm including things like automakers that use wiring harnesses made in Ukraine, semiconductor companies using neon gas from Ukraine, and many industries that use products exported by Russia.
While investors may feel hesitant to buy an oil producer, the reality is that the relevance of fossil fuels to the world's energy needs isn't going to disappear overnight. In addition, Chevron's CEO Mike Wirth acknowledged at a recent investor day event that "the past two years also reinforced that the future of energy is lower carbon." As such, the company is actively increasing investment in its lower-carbon energy resources to remain relevant in a world moving toward green energy, but over the long term.
It makes sense to buy some portfolio protection with Chevron, and the 3.4% dividend yield and Buffett's seal of approval don't hurt either.
Growth could slow, but UPS remains an excellent business
Daniel Foelber (United Parcel Service): When great companies go on sale for factors outside of their control, then it's usually a buying opportunity. Share prices of UPS are down 18% from their all-time high even though UPS crushed 2021 expectations and guided for a favorable year in 2022.
Aside from broader market volatility, part of the reason for the recent UPS stock slide may be due to FedEx's cautious guidance. The company mentioned inflation, supply chain issues, a labor shortage, and ongoing COVID-related challenges as reasons to be weary in the year ahead. FedEx and UPS report earnings about a month and a half apart from each other, which can provide a nice barometer on the package delivery industry. FedEx reported its most recent quarterly results on March 18, whereas UPS isn't expected to report its results till the morning of April 26. It's worth mentioning that UPS has so far done a better job at combating challenges, particularly the supply chain challenge and the labor shortage, than FedEx. But FedEx's soft guidance raises a red flag that economic growth may be slowing.
Rising interest rates could slow down economic output because it makes borrowing money more expensive, and thus puts a strain on unprofitable businesses that depend on capital markets. Even if interest rates do rise and inflation comes down, we could still see negative real gross domestic product (GDP) in the quarters to come. Real GDP is GDP adjusted for inflation. This phenomenon of high inflation, rising unemployment, and slow or negative real economic growth is known as stagflation -- and it's every economist's worst nightmare. Thankfully, the Fed is raising interest rates to try to stop this problem before it gets any worse. What's more, U.S. unemployment is near a 40-year low, which is a great sign that people are working and can better absorb higher costs.
UPS grew at a torrid rate in 2020 and 2021, so it's understandable if that growth rate slows. But given the company's impeccable management, its high operating margin, and its 3.1% dividend yield, there's also every reason to believe that UPS will continue to be the leader in its industry and outlast economic downturns.
Have a Dividend King and a smile
Scott Levine (Coca-Cola): There are plenty of stocks found throughout the market that can be considered safe, but to be counted among the holdings of the Oracle of Omaha himself represents a different level of safety altogether. And the fact that Coca-Cola has found itself in Buffett's portfolio for nearly 25 years suggests that this is a beverage stock -- with a 2.8% dividend yield -- that could certainly satisfy dividend-thirsty investors.
It's not merely that Coca-Cola has received Buffett's approval that indicates the safety of the stock. Circumspect investors will appreciate the fact that the stock has achieved Dividend King status, having increased its dividend for the past 60 years. That's no small feat. Coca-Cola's consistently deft management of capital to both achieve growth in the business while simultaneously increasing the dividend is something of which few companies can brag.
Investors, moreover, can find other indications of how the dividend is safe by checking out the company's cash flow statement. Coca-Cola's free cash flow generation is simply effervescent. For the past five years, Coca-Cola has averaged annual free cash flow generation that represented 26% of its sales. Its closest competitor, PepsiCo, on the other hand, generated average annual free cash flow that only represented 8.6% of its revenue.
This ability to generate strong free cash flow provides an additional level of security regarding the dividend. Over the past 10 years, for example, Coca-Cola has averaged an annual dividend per share of $1.40 -- an amount that is well covered by the annual free cash flow per share of $1.78 that it averaged during the same period.