Investors looking for a way to generate passive income have lots of options but few are as simple as buying dividend-paying stocks and collecting the quarterly payouts. There are many to choose from and simply looking for the highest yield isn't always a great game plan.
When selecting stocks to provide a steady income stream in your retirement years, it's important to find businesses with strong competitive advantages that will allow them to steadily raise their payouts year after year. You could scour the stock market on your own or you could follow the lead of legendary investor Warren Buffett. Since he took control of Berkshire Hathaway (BRK.A +0.00%)(BRK.B 0.24%) in 1965, shares of the holding company have appreciated at a compound annual growth rate of 19.7%.
NYSE: BRK.A
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These stocks are significant components of Berkshire Hathaway's portfolio and they all offer relatively high yields of 4.1% at recent prices. Here's how they could deliver growing dividend payouts to your brokerage account.
1. Chevron
Chevron (CVX +2.95%) is an integrated oil and gas giant that Buffett bet big on during the first three months of 2022. It's now the fourth-largest holding in Berkshire's equity portfolio. At recent prices, the stock offers a nice 4.1% yield that could grow significantly along with the rising cost of oil.
NYSE: CVX
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Chevron's oil-producing business is set up to deliver strong profits. In March, the company told investors it can grow its dividend and reduce debt even if the price of oil falls to just $50 per barrel and stays there for the next five years. At $75 per barrel, the company thinks it can raise its payout and buy back more than 25% of outstanding shares. At the moment, oil is trading at around $98 per barrel after spending about four months above $100 per barrel.
The future is uncertain, but we can be relatively confident about Chevron's ability to weather another storm. Lower oil prices can pressure the company's production segment but it also lowers input costs for the company's refining and chemicals business. With a diverse operation that can adapt to market changes, investors can look forward to years of increasing dividend payouts from this stock.
2. U.S. Bancorp
U.S. Bancorp (USB +0.42%) is the parent of U.S. Bank, a relatively big regional bank with mostly traditional and commercial banking operations. At the moment, the stock offers a 4.1% yield that is positioned for strong growth in the years ahead.
NYSE: USB
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Unlike JPMorgan Chase and other mega-banks, U.S. Bancorp lacks an investment banking division. This focus on traditional banking has made the low interest rate environment of the past decade especially challenging because low rates don't leave much room to squeeze out a profit. Despite the challenge, this well-run bank has been able to raise its dividend payout by 136% over the past decade.
Now that rates are on the rise, though, profit growth at this bank could accelerate. U.S. Bancorp makes most of its money in the form of net interest income. This is essentially the difference between interest paid to depositors and interest received from lenders. In April, the company said net interest income would rise around 3.3% if the Federal Reserve gradually raises interest rates by 2%. In June, the consumer price index increased by a frightening 9.1% year over year, which will most likely prompt the Federal Reserve to raise rates more than 2% before the end of the year.
Mounting fear of a recession has pushed U.S. Bancorp's stock price down to just 1.5 times its book value. With the exception of the last nine months of 2020, that's a lower valuation than this stock has seen in over a decade. While a recession could limit lending activity in the quarters ahead, they rarely last very long. Economic recoveries, on the other hand, generally last for years at a time. With interest rates and time on its side, this bank stock has a very good chance to produce market-beating gains over the long run.
