For more than 57 years, Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.93%) CEO Warren Buffett has put on a moneymaking clinic for Wall Street. Since taking the helm, he's guided his company's Class A shares (BRK.A) to a greater than 20% average annual return, which nearly doubles up the 10.5% average total return, including dividends, for the benchmark S&P 500 over the same time frame.
When the Oracle of Omaha buys or sells a stock, everyone from retail investors to Wall Street professionals pays close attention.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Say what? Warren Buffett is selling high-yield income stocks
Perhaps the biggest surprise in the latest round of Form 13F filings with the Securities and Exchange Commission -- 13Fs provide snapshots of what the brightest money managers bought and sold in the most recent quarter -- is that Buffett's company was an active seller of high-yield dividend stocks.
This is "surprising" because dividend stocks offer a rich history of outperformance. A J.P. Morgan Asset Management study from 2013 found that companies initiating and increasing their payouts between 1972 and 2012 averaged an annual gain of 9.5%. By comparison, non-dividend payers managed a paltry average annual return of 1.6% over the same 40-year stretch.
What's more, income stocks are almost always profitable on a recurring basis and time-tested. These are companies that can often be added to your portfolio and forgotten about for months or years at a time.
But possibly the biggest shock of all is that Warren Buffett moved out of dividend stocks with the U.S. inflation rate hitting four-decade highs. Income stocks can provide at least a partial hedge against the capital-eroding effects of inflation.
What follows are the three high-yield dividend stocks Buffett sold during the second quarter.
Verizon Communications: 5.8% yield
The first juicy dividend stock that Warren Buffett's Berkshire Hathaway completely sold out of during the second quarter is telecom giant Verizon Communications (VZ -0.47%).
Berkshire's Verizon investment was interesting, to say the least. Normally, the Oracle of Omaha and his investing team buy into companies with the expectation that they'll be held for many years, if not decades, to come. The bulk of Berkshire Hathaway's Verizon stake was jettisoned after about a year. While Verizon's high-yield payout was likely the lure for Buffett, increasing competition from the likes of T-Mobile and AT&T put a big damper on Verizon's operating performance and, ultimately, its share price.
Although growth is liable to remain slow as long as inflation continues to weigh on consumer spending habits, Verizon does have a silver lining in the form of the 5G revolution. It's been about a decade since wireless download speeds were meaningfully improved, which gives consumers and businesses plenty of incentive to upgrade their smartphones. Since data is where Verizon Wireless generates its juiciest margins, spending big on 5G infrastructure should pay off handsomely for the company.
Verizon is also investing heavily in broadband. The company has spent billions buying 5G mid-band spectrum, with the goal of offering 5G broadband service to 50 million households and 14 million businesses by the end of 2025. Broadband helps provide steady operating cash flow and can lead to higher-margin bundling opportunities.
Now sporting a 5.8% yield, Verizon looks quite attractive for investors with an abundance of patience and an allergy to volatility.
Image source: Getty Images.
STORE Capital: 5.6% yield
Easily one of the more surprising sales of the second quarter was that of real estate investment trust (REIT) STORE Capital (STOR). Buffett and his team sold more than 7.8 million shares, equating to a 53% reduction of Berkshire Hathaway's stake at the end of March 2022.
Why sell? The best guess I can offer is that either Warren Buffett or his investing lieutenants, Todd Combs and Ted Weschler, are genuinely concerned about the U.S. entering a recession. We've already had back-to-back quarters of gross domestic product retracement, which puts the U.S. in a "technical recession." If economic activity were to further deteriorate as the Federal Reserve raises interest rates, it's possible REITs could see an increase in rental payment delinquencies.
However, this worst-case scenario probably isn't in STORE Capital's future for two good reasons.
First off, STORE Capital utilizes a triple-net lease structure (sometimes called "NNN leases") with its tenants. Triple-net leases require a tenant to handle all property costs, including maintenance, utilities, and even property taxes and insurance expenses. Although rental rates for NNN leases are usually lower to account for the extra expenses tenants deal with, it means there are virtually no surprises for the landlord (i.e., STORE).
The other consideration is that STORE Capital specifically buys what it calls "profit-center real estate." These are properties that are critical to the success of the tenants it leases to. In other words, it makes rental defaults less likely.
It's quite possible the Oracle of Omaha and/or his investing lieutenants may come to regret selling north of 7.8 million shares of STORE Capital.
U.S. Bancorp: 3.9% yield
The third high-yield dividend stock Warren Buffett has been selling is regional bank U.S. Bancorp (USB -0.53%), the parent of the more-familiar U.S. Bank. You'll note I'm fudging the numbers just a tad: U.S. Bancorp's 3.9% yield is just a smidge below the typical threshold for a high-yield income stock of 4%.
Whereas operating weakness and a softening U.S. economy can reasonably explain why shares of Verizon and STORE Capital were respectively sold during the second quarter, there's likely a much more benign explanation behind the 6.6 million shares of U.S. Bancorp that were dumped.
Short of gaining approval from the nation's central bank, Berkshire Hathaway is required to keep its stakes in bank stocks below 10% to avoid being labeled as a bank holding company (BHC). If Berkshire were to be labeled a BHC, its reporting requirements would become far more burdensome, and its trading activity would be somewhat restricted. Because U.S. Bancorp is also a top holding of New England Asset Management, which Berkshire Hathaway owns, Buffett and his team have to, from time to time, trim their stake to avoid cresting the 10% ownership threshold.
Make no mistake about it: The Oracle of Omaha loves U.S. Bancorp. That's because it's conservatively run and has avoided the riskier derivative investments that proved to be pitfalls for money-center banks during previous recessions. By focusing on the boring but extremely profitable aspects of banking (growing loans and deposits), it's been able to consistently generate one of the highest return on assets in the industry.
Arguably the most impressive aspect of U.S. Bancorp is the company's digital engagement trends. At the end of May 2022, 82% of active customers were banking digitally, with 64% of total loan sales completed via mobile app or online. Digital transactions are considerably cheaper for banks than in-person and phone-based interactions. In short, it's allowed U.S. Bancorp to consolidate its physical branches and lower its noninterest expenses.
