For nearly six decades, Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%) CEO Warren Buffett has put on an investing clinic for Wall Street. Since becoming CEO in 1965, he's helped create more than $670 billion in value for shareholders (himself included) and delivered an aggregate return for his company's Class A shares (BRK.A) of 3,735,202% as of the closing bell on Jan. 19, 2023.
Many of the Oracle of Omaha's investing strategies are well known, such as buying time-tested businesses and holding them over many years, if not decades. But it's Buffett's affinity for dividend stocks that's truly been a game-changer. Since income stocks tend to be profitable on a recurring basis and time-tested, they're just the types of businesses we'd expect to outperform over long periods.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Berkshire Hathaway's investment portfolio is home to nearly three dividend stocks, some of which are in the high-yield category (4% yields or above). While two of these high-yield Warren Buffett stocks are begging to be bought by value-and-income-seekers in 2023, another high-yield Buffett stock is best avoided in the new year.
High-yield Warren Buffett stock No. 1 to buy hand over fist: U.S. Bancorp (4.2% yield)
The first top-tier income stock in Berkshire Hathaway's portfolio that can confidently be bought hand over fist in the new year is regional bank U.S. Bancorp (USB -3.61%). The parent company of the more familiar U.S. Bank is parsing out a market-topping 4.2% yield.
Normally, there'd be little reason to discuss buying bank stocks when there's a growing likelihood of a U.S. recession. During recessions, it's typical for loan losses to rise for banks and for the nation's central bank to reduce interest rates to spur lending. Lower interest rates can reduce banks' net interest income-earning potential at a time when they're forced to set aside capital to cover higher loan losses.
But things really are different this time around. With inflation hitting a four-decade high of 9.1% in June 2022, the Fed has been on the offensive with interest rate hikes -- and it's still not done. Even if the U.S. enters a recession this year, the added benefit of higher lending rates on variable-rate loans should more than offset loan losses. In other words, bank stocks have the potential to grow their earnings per share during an economic contraction.
What really sets U.S. Bancorp apart and makes it such a no-brainer buy in 2023 is its digitization push. At the end of August 2022, 82% of its active customers were banking digitally, and an impressive 62% of total loan sales were completed online or via mobile app. For banks, online and mobile transactions cost just a fraction of what in-person and phone-based encounters run. Pushing for digital interaction has allowed U.S. Bancorp to consolidate some of its branches, which should make its operations more efficient.
Considering U.S. Bancorp consistently delivers some of the highest returns on assets among large banks, its multiple of 9 times Wall Street's consensus earnings for 2023 is a stellar deal.
High-yield Warren Buffett stock No. 2 to buy hand over fist: Paramount Global (4.9% yield)
The second high-yield Warren Buffett stock that stands out as an amazing deal in 2023 is media giant Paramount Global (PARA 3.64%). Paramount's 4.9% yield is approaching nearly three times the average yield of the S&P 500.
Like most media stocks, Paramount was taken to the woodshed in 2022. Legacy media companies have been put through the wringer due to large losses tied to their streaming operations, as well as the aforementioned expectation that a recession will take shape in the United States. Paramount's TV Media segment accounted for 72% of its $22 billion in revenue through the first nine months of 2022, with advertising making up 42% of its sales mix. As advertisers have pulled back on their budgets, it's had a tangible impact on Paramount Global.
But as I noted last week, this story has another side. Even though ad spending is highly cyclical, the U.S. economy spends a disproportionately longer amount of time expanding than it does in a recession. Historically, bear markets and recessions have been excellent opportunities to buy ad-driven businesses beaten down by pessimistic traders.
Paramount has momentum at the box office, too. Despite domestic box office sales still being down considerably from where they were before the pandemic, Top Gun: Maverick obliterated even the highest expectations and brought in nearly $1.5 billion worldwide. This has helped all facets of Paramount's Film Entertainment division.
However, it's the company's streaming operations that'll likely be key to sending its stock higher in 2023 (and beyond). Paramount closed out the third quarter with close to 67 million direct-to-consumer (DTC) subscribers, up 20 million from the comparable quarter in 2021. Mind you, this DTC growth accounts for 3.9 million subs lost when Paramount pulled its services from Russia during the second quarter.
Furthermore, Paramount has seen exceptionally strong viewership of Pluto TV, the United States' No. 1 free ad-supported streaming service. If the U.S. economy weakens, Pluto TV's freemium model could allow it to gain a significant share.
Image source: Getty Images.
The high-yield Warren Buffett stock to avoid like the plague: Kraft Heinz (4% yield)
Unfortunately, a high yield isn't everything when it comes to investing. Sometimes a high yield masks a company with underlying operating issues, which I believe to be the case with consumer staples stock Kraft Heinz (KHC 0.85%). Even though this prepackaged food and condiments company has a market-topping yield, it's also rife with red flags.
If there's one silver lining for Kraft Heinz -- other than owning more than a dozen easily recognizable brand-name food and snack brands -- it's that the pandemic encouraged consumers to eat at home more often. Kraft Heinz's large lineup of easy-to-make meals has thrived as eating habits have shifted since early 2020. However, this silver lining looks to be slowly going away.
A glance at Kraft Heinz's organic growth rate of 9.5% through the first nine months of fiscal 2022 would appear to indicate that everything is going swimmingly. But dig beneath the surface, and you'll begin to see the cracks.
For example, the company's 9.5% organic growth rate results from a 12.3% price increase and a 2.8% decline in volume. The company's 3.8% volume decline was even more noticeable during the third quarter. This data suggests that while Kraft Heinz does, indeed, have reasonable pricing power behind its premium brands, some consumers are opting for cheaper brands. As recession fears grow, it wouldn't be a surprise to see consumers substitute for less-costly brands.
Additionally, Kraft Heinz's balance sheet is a bit of a mess. Even after taking a $15.4 billion goodwill writedown in 2019, the company had nearly $30.6 billion in goodwill, $42.4 billion in intangible assets, and almost $20.1 billion in long-term debt on its balance sheet, as of Sept. 24, 2022. Kraft Heinz has minimal financial flexibility to reignite interest in its brands, and it isn't exactly positioned to command top-dollar for any assets it's tried to sell.
Although Kraft Heinz isn't expensive at 15 times Wall Street's forecast earnings for 2023, a complete lack of forecast sales growth in the face of historically high inflation is a telltale sign that things aren't right.
