Warren Buffett and his company Berkshire Hathaway are highly regarded for their savvy investments, which have produced phenomenal returns over the years. But even the Oracle of Omaha isn't perfect -- he's made some mistakes and missed out on opportunities. In addition, Buffett and Berkshire are investing hundreds of billions of dollars for a wide array of shareholders and stakeholders, which makes their investing strategy much different from that of the average retail investor.
During the earlier part of the pandemic in 2020 and 2021, Berkshire sold a number of stocks to prepare for the situation at hand and the new trajectory the world was on due to COVID. Here are two I think investors should take a look at that will have yields of about 3% when recent dividend increases are taken into account.
1. Wells Fargo
Buffett and Berkshire formally put an end to their love affair with Wells Fargo (WFC 1.24%) during the first quarter of this year, selling a small remaining stake in the large U.S. bank after decades of holding the stock.
The relationship started to sour when Wells Fargo's phony-accounts scandal came to light in 2016, in which employees at the bank opened credit card and bank accounts without the authorization of their customers. As part of the bank's punishment, the Federal Reserve implemented an asset cap in 2018 that essentially prevents the bank from expanding its balance sheet -- thereby hurting profits. The cap is still in place today.
But Wells Fargo has definitely started to clean up its act -- and not only on the regulatory side, but also from an operational standpoint. Since becoming chief executive officer in 2019, Charlie Scharf has sold off a number of business units to focus on Wells Fargo's core U.S. franchise, and has created a new regulatory regime that has started to chip away at the bank's remaining consent orders and the asset cap. The bank has also launched more credit card lending, which is off to a promising start, and vowed to trim $10 billion of annual expenses over the next few years, a process that is well underway now.
Wells Fargo had to cut its dividend by 80% during the pandemic, but has begun to raise it to much better levels. The bank recently announced that it plans to increase its quarterly dividend from $0.25 to $0.30 in the third quarter.
With a current share price of roughly $40 as of this writing, that brings the bank's annual dividend yield to about 2.5%, but the dividend increase will push that to 3%. With analysts on average projecting Wells Fargo to generate $4.12 of earnings per share in 2022, that gives Wells Fargo a projected dividend payout ratio of roughly 29%. Most banks pay in the 30% to 40% range, and I'd expect Wells Fargo to increaser earnings in 2023, making future dividend growth likely.
2. Goldman Sachs
Buffett and Berkshire first took a position in the investment banking giant Goldman Sachs (GS 3.30%) in 2008 when the bank got into trouble during the Great Recession. The shares Berkshire held up until a few years ago ultimately came from warrants that it converted. But when the pandemic arrived at the beginning of 2020, Buffett and Berkshire didn't wait too long before dumping the stock.
However, following the early months of the pandemic, Goldman would go on to perform extremely well as initial public offerings, special purpose acquisition companies, and various trading businesses drove huge profits.
The bank has also been actively building out its consumer banking and wealth management business primarily with its digital bank Marcus, which has been considered a big success, bringing in lots of deposits and growing Goldman's loan portfolio as well. The goal is to create more durable and consistent earnings at the bank that can offset some of the volatility inherent in the investment banking world.
Goldman recently increased its quarterly dividend from $2 to $2.50 per share, another big increase. With Goldman trading around $400 per share as of this writing, that will give the bank an annual dividend yield of almost 3.3%. With analysts on average projecting Goldman to make about $38 per share this year, that gives Goldman a dividend payout ratio of 26%, which also leaves plenty of room for growth.
