Berkshire Hathaway (BRK.A -0.57%) (BRK.B -0.55%) is famous for not paying dividends. The logic is simple: Warren Buffett and his team believe they can put the capital that would have been distributed via dividends to better use and compound it over time.
So far, they've been right, as Berkshire gave investors a compound annual return of 20.1% between 1965 and 2021 compared to 10.5% for the S&P 500 with dividends reinvested.
However, just because Berkshire doesn't pay a dividend doesn't mean that Buffett doesn't like dividend stocks. In fact, most of Berkshire's public equity portfolio is in dividend stocks, many of which have high yields and have paid and raised their dividends for decades. Kraft Heinz (KHC -0.73%), Celanese (CE -1.19%), and Procter & Gamble (PG 0.05%) stick out as three good buys now. Here's why.
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Snatch this tasty high-yield dividend stock that's hanging on the sale rack
Scott Levine (Kraft Heinz): Fear of an economic downturn -- while significant -- is hardly the only thing frightening investors these days. There's also the rising cases of monkeypox, increasingly tense U.S.-China relations, and the ongoing conflict in Ukraine. This is leaving a lot of investors running to consumer defensive stocks like Kraft Heinz, especially since it currently offers investors a juicy 4.2% forward dividend yield.
Found in Berkshire Hathaway's portfolio since 2013, shares of Kraft Heinz are also trading at a discount these days, making them even more appetizing for investors. While the stock has a five-year average multiple of 25.5 times operating cash flow, it's currently valued at only 11.3 times cash from operations. And that's not the only perspective from which shares of Kraft Heinz seem attractively priced; they're also trading at 14 times forward earnings, representing a discount to the S&P 500's forward earnings ratio of 17 based on 2023 earnings.
Skeptics may be wondering just how savory the stock is, what with inflation cutting into the company's bottom line. For example, in the second quarter of 2022, Kraft Heinz reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.5 billion -- a year-over-year decrease of 11%.
Management, however, seems to think that while it's still a factor, the deleterious effect of inflation on the company's financials may be easing. During the Q2 2022 earnings presentation, CEO Miguel Patrico commented, "Inflation is still high, but we are seeing some costs beginning to recede from peak levels and others showing signs of leveling off."
Like so many companies, inflation represents a notable headwind affecting Kraft Heinz, but it will be temporary. The company's portfolio of leading international brands is resilient, and though it may suffer in the short term, Kraft Heinz is a great way to gobble up some passive income for the long term.
An under-the-radar value stock
Lee Samaha (Celanese): The chemical and specialty materials company isn't a household name, but its products are used all over the home and outside of it too. Its chemicals and engineered materials are used in everything from paints and coatings to automotive applications, electronics, construction, and packaging.
As such, it's typically seen as a highly cyclical company -- demand for its chemicals ebbs and flows with the economy. So the pricing of its acetyl chain products can fluctuate violently. That's why its revenue and earnings have enjoyed a wild ride over the last decade.
Data by YCharts
However, if Buffett is known for anything in the investing world, it's for investing in businesses that have the potential to improve their return on investment (that doesn't necessarily mean revenue growth). So while speculators try to guess the near-term trend in acetyl chain product prices and the economy, Buffett-like investors notice how Celanese's management has been investing in expanding low-cost production plants.
Meanwhile, the addition of DuPont's Mobility and Materials business allows Celanese to generate substantive synergies due to the complementary nature of the businesses. As such, Celanese should be able to increase its long-term return on investment, which will keep Berkshire Hathaway investors happy.
P&G is far from a fair-weather stock
Daniel Foelber (Procter & Gamble): At first glance, the stock market's epic rally off the mid-June 52-week lows may indicate that the bear market is over. However, the truth is that many of the headwinds that were dragging the market lower haven't gone away. If anything, they've gotten worse.
Procter & Gamble has a resilient portfolio of consumer products that can thrive during a recession. But even this stalwart is feeling the impacts of inflation on its bottom line as input costs rise. To combat inflation, P&G has several products across different price points that can keep customers engaged with P&G's brands even if they reduce spending.
The same can't be said for other name brands that don't have affordable options (think luxury goods and expensive consumer discretionary products). However, growth is slowing at P&G. To make up for it, the company is relying on price increases.
The good news is that the investment thesis for P&G isn't dependent on whether we are in a bear market. Rather, P&G has continued to prove that low-to-mid-single-digit organic growth, paired with top brands and excellent management, is a recipe for impeccable shareholder value through buybacks and dividend raises.
What makes P&G an excellent dividend stock to buy and own for decades is that its business is fairly easy to understand, and the company is transparent about its goal to incrementally raise the dividend and support buybacks over time. Few charts illustrate P&G's dedication to buybacks and growing the dividend better than this 10-year chart.
PG Shares Outstanding data by YCharts
P&G's outstanding share count has decreased by over 12% over the last decade, which boosts earnings per share. P&G's dividend has also increased by over 62% over the last 10 years, while the stock price has more than doubled.
Add it all up, and there's reason to believe that P&G gives investors one of the most reliable passive income streams of any stock on the market.
