Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.91%) CEO Warren Buffett has been a wealth-building machine longer than most Americans have been alive. Since taking over as CEO in 1965, he's overseen the creation of more than $660 billion in shareholder value and delivered an aggregate return for his company's Class A shares of 3,641,613%, through Dec. 31, 2021.
The Oracle of Omaha's recipe for success involves buying high-quality, brand-name businesses and allowing those businesses to grow over multiple years or decades. But the unheralded stars of Warren Buffett's portfolio are, more often than not, dividend stocks.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Companies that regularly pay a dividend are often profitable on a recurring basis and time-tested. Perhaps more importantly, they have an impressive track record of running circles around their peers that don't pay a dividend over long periods.
Knowing how important dividend income can be, Warren Buffett has packed Berkshire Hathaway's portfolio with income stocks yielding well above the average yield of the S&P 500. What follows are the six highest-yielding stocks in Warren Buffett's portfolio, as of this past weekend (but taking into account the company's most-recent Form 13F filing).
1. STORE Capital: 5.27% yield
If you want to ride Warren Buffett's coattails into the highest yield possible, look no further than real estate investment trust (REIT) STORE Capital (STOR) at 5.3%. In order to avoid normal corporate income tax rates, REITs are required to pay out most of their earnings as a dividend to their shareholders.
STORE's not-so-subtle secret to success is its triple-net leases. Triple-net leases, sometimes known as "NNN leases," require the tenant to cover all property expenses. This includes maintenance, utility bills, and even the insurance and taxes associated with the property. Though triple-net leases often result in lower rental rates since the tenant is required to take on more financial responsibility, it makes STORE's operating cash flow about as transparent and predictable as possible.
What's more, STORE Capital has focused on purchasing what it calls "profit-center real estate" for middle-market companies. Effectively, STORE seeks out properties that are essential to the businesses it leases to. This makes it far less likely that tenants would default on their rental payments.
2. Kraft Heinz: 4.14% yield
Packaged foods and beverage company Kraft Heinz (KHC 0.98%) is doling out a generous dividend as well. Even after reducing its payout in 2019, the company's yield of more than 4.1% places it in the high-yield category.
Although Warren Buffett has an incredible track record, even great investors are fallible. Berkshire Hathaway's hefty stake in Kraft Heinz is a perfect example of that. Heinz grossly overpaid for Kraft Foods in 2016, and the combined company's balance sheet has been paying for it ever since. Even with a greater than $15 billion goodwill writedown in 2019, the company's balance sheet remains debt heavy and with minimal wiggle room to reinvest in its brands.
The silver lining here is that the COVID-19 pandemic has encouraged consumers to eat at home more often. That's boosted sales of pre-packed and quickly prepared meals and snacks, which is the heart of Kraft Heinz's operating model.
3. U.S. Bancorp: 3.77% yield
Longtime holding U.S. Bancorp (USB 1.48%) is yet another rock-solid income stock hiding in plain sight in Buffett's portfolio. Its relatively high 3.8% yield is a reflection of its superior return on assets (ROA) among larger bank stocks.
Whereas most money-center banks got themselves in big trouble during the financial crisis by chasing after riskier derivative investments, U.S. Bancorp's management team has predominantly stuck with the bread and butter of banking: loan and deposit growth. It's not sexy by any means, but it's a tried-and-true way for banks to grow their profits and payouts over the long run.
What really allows U.S. Bancorp to stand out is the company's digital engagement. As of May 31, 2022, 82% of its active customers were banking digitally. This includes 64% of total loan sales being completed online or via mobile app, which is up from just 45% at the beginning of 2020. Online and mobile-based transactions are substantially cheaper for banks than in-person or phone-based interactions. It's just another reason U.S. Bancorp is an ROA beast among bank stocks.
Image source: Getty Images.
4. Citigroup: 3.75% yield
Not far behind U.S. Bancorp in yield is money-center giant Citigroup (C 3.06%). Although Citigroup has endured its struggles over the past decade and change, it hasn't hurt the company's ability to handily outpace the average yield (1.7%) of the broad-based S&P 500.
Perhaps the biggest catalyst for Citi at the moment is historically high inflation. With the Federal Reserve having little choice but to get aggressive with interest rates in order to tame inflation, banks stocks should see a healthy uptick in the net-interest income collected from variable-rate outstanding loans. And to be clear, the nation's central bank doesn't appear to be anywhere close to ending its hawkish monetary stance.
Citigroup should also benefit from the cyclical nature of the banking industry. Though bank stocks like Citi are susceptible to rising loan delinquencies and charge-offs during periods of economic contraction and recessions, the U.S. and global economy spend far more time expanding than contracting. Patience in the banking industry usually pays off handsomely.
5. Paramount Global: 3.67% yield
Another relatively new holding that's generating a sizable yield for the Oracle of Omaha is media and entertainment company Paramount Global (PARA -0.48%). Paramount's almost 3.7% yield is about two percentage points higher than the S&P 500's dividend yield.
The no-brainer catalyst for Paramount throughout this decade is going to be its streaming push. As consumers move away from traditional cable bundles and toward less-expensive bolt-on streaming packages, Paramount+ has made sizable gains. Even after removing its services from Russia, global direct-to-consumer subscribers jumped to nearly 64 million. Paramount+ added 3.7 million net subscribers during the second quarter.
However, Paramount is also reaping the rewards of at least some moviegoers returning to the theater. Although movie theater attendance has been in decline since 2002, Top Gun: Maverick propelled the company's film entertainment segment to a greater-than-doubling in revenue in the June-ended quarter. If moviegoing continues to normalize closer to pre-pandemic levels, Paramount's payout could increase even more over time.
Chevron has increased its base annual payout in each of the past 35 years. CVX Dividend data by YCharts.
6. Chevron: 3.55% yield
Last but not least, Big Oil is known to pay some hefty dividends, and integrated oil stock Chevron (CVX 1.20%) is no exception. The $5.68 per share Chevron is handing out each year works out to a nearly 3.6% yield. Tack on an up to $10 billion share buyback in 2022, and it's easy to see why Warren Buffett has piled into this stock.
There's a decent chance that Chevron, a Dividend Aristocrat, will no have trouble growing its payout for the foreseeable future thanks to global energy supply chain disruptions. Major energy companies significantly reduced their capital investments during the COVID-19 pandemic. Add to this Russia's invasion of Ukraine, and there's the real possibility that supply constraints could lift crude oil and natural gas prices for years to come.
Then again, Chevron's secret weapon might be its integrated operating structure. Although it generates its juiciest margins from drilling, the company also owns transmission pipelines, refineries, and chemical plants.
Midstream pipelines typically rely on fixed-fee of volume-based contracts, which is a fancy way of saying they generate very predictable cash flow no more how volatile energy commodity prices are. Meanwhile, downstream operations like refineries and chemical plants benefit when input costs (i.e., crude prices) fall. In other words, Chevron is well-hedged within the oil and gas space.
