Among prominent investors, Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.91%) CEO Warren Buffett has been in a class of his own since taking the reins in 1965. Whereas the widely followed S&P 500 has averaged a 9.9% annualized return, including dividends, since Buffett became Berkshire Hathaway CEO, the Oracle of Omaha has produced a stellar 19.8% average annual return for the company's Class A shares.
Following Warren Buffett's every move has been a profitable and generally easy thing to do, largely thanks to required quarterly Form 13F filings with the Securities and Exchange Commission.
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However, not all of Berkshire Hathaway's holdings can be found in the company's 13F filings. Thanks to the $22 billion acquisition of reinsurance giant General Re in 1998, Warren Buffett has a secret portfolio. When Berkshire bought General Re, it also acquired specialty investment firm New England Asset Management, which General Re owned.
This $5.4 billion secret portfolio, which isn't overseen by the Oracle of Omaha in the same way he manages Berkshire's $322 billion portfolio, contains more than 100 securities. Although New England Asset Management's portfolio managers were notable sellers of equities during the fourth quarter, they did pile into a handful of high-yield dividend stocks, according to the latest 13F.
What follows are three high-yield dividend stocks being purchased for Warren Buffett's secret portfolio.
Verizon Communications: 7% yield
The first high-yield dividend stock being actively bought for Buffett's secret portfolio is telecom company Verizon Communications (VZ -4.67%). New England Asset Management increased its stake in Verizon by more than 33,100 shares (about 29%) during the fourth quarter.
Although telecom stocks underperformed the broader market when interest rates were near historic lows, a bear market for all three major U.S. stock indexes has put this low-volatility, steady-profit industry back on the radar.
One probable reason we've seen Buffett's hidden portfolio adding shares of Verizon is the predictability of cash flow. Over time, owning a smartphone and having access to wireless and internet services have become basic necessities for many Americans. This means an economic downturn isn't going to be enough to coerce wireless or broadband subscribers to leave en masse. In other words, Verizon's cash flow doesn't deviate much from year to year.
Verizon is also set to benefit from two sustainable catalysts. The first is quite evident: the ongoing rollout of 5G wireless infrastructure. It took about a decade for wireless companies to substantially improve wireless download speeds. With 5G coverage expanding, there's a tangible reason for businesses and consumers to upgrade their wireless devices. For Verizon, the payoff is an increase in data consumption, which should have a positive impact on the company's wireless operating margin.
The less-apparent growth driver for Verizon is its broadband segment. Even though broadband hasn't been a growth story since the 2000s, it's a dangling carrot that's enticing businesses and consumers to bundle their services. Verizon's 416,000 net broadband additions during the fourth quarter represented its best performance in more than a decade.
With a 7% yield and a price-to-earnings ratio of just 8, based on Wall Street's forecast earnings for 2023 and 2024, Verizon looks to have reasonable upside with a relatively safe floor.
Duke Energy: 4.32% yield
A second high-yield dividend stock that's being bought for Warren Buffett's secret portfolio is electric utility Duke Energy (DUK -0.12%). New England Asset Management picked up nearly 9,000 shares of Duke during the fourth quarter.
Similar to Verizon, Duke Energy took a backseat to growth stocks for most of the past decade. Historically low lending rates coerced investors to scoop up faster-growing companies capable of taking advantage of cheap capital. This meant little love for the traditionally slow-growing utility stocks. But with the bear market out in full force, predictable utility stocks -- especially those with high-yield payouts -- are back on the radar.
The beauty of electric utilities like Duke Energy is they provide a basic necessity service. If you own or rent a home, electricity is pretty much a must-have. Since demand for electricity doesn't change much from one year to the next, utilities are able to accurately forecast their cash flow and capital outlays with a high degree of confidence.
I'd also add that most electric utilities operate as monopolies, or in rarer cases, duopolies. Since homeowners and renters don't have much say in the company that provides their electricity services, it further reinforces the predictability of cash flow for companies like Duke.
If there's a prevailing growth driver for Duke Energy, it's the company's sizable investments in clean energy projects. The company is planning to spend $65 billion over five years to primarily invest in renewable energy sources. Duke has laid out goals of bringing approximately 3,100 megawatts (MW) of solar into service by 2028, along with 1,600 MW of battery storage by 2029. Though these are hefty investments from a price perspective, they should help lift Duke's adjusted earnings growth rate above the industry average.
Valued at less than 16 times Wall Street's forecast earnings for 2024, Duke Energy stock is the cheapest it's been on a forward-earnings basis in eight years.
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AT&T: 6.04% yield
The third high-yield dividend stock Warren Buffett's secret portfolio has been actively buying is yet another telecom provider, AT&T (T -1.21%). The fourth quarter saw New England Asset Management's investment team buy close to 272,000 shares.
In many ways, the headwinds and catalysts for AT&T and Verizon are similar. These are mature businesses with generally slow growth rates that simply didn't receive a lot of attention when interest rates were at historic lows. But with a single-digit price-to-earnings ratio and a yield of 6%, investors are beginning to pay close attention to the value AT&T can offer.
The 5G revolution has been a particularly strong catalyst for the company. The nearly 6% wireless revenue growth AT&T recorded during the third quarter represented the fastest pace of growth for its wireless segment in more than a decade.
It's been something of a renaissance for AT&T's broadband segment, too. Thanks to hefty investments in the 5G mid-band spectrum, which are designed to facilitate at-home and business-based 5G broadband adoption, AT&T has added at least 1 million net broadband subscribers in each of the past five years.
However, one notable difference between AT&T and Verizon is AT&T's spinoff of content arm WarnerMedia last April. When WarnerMedia was spun off and merged with Discovery to create a new media entity, Warner Bros. Discovery, the new company assumed certain debt lots previously held by AT&T. Including additional cash payments, AT&T received more than $40 billion from this divestment. Now sporting a cleaner balance sheet, AT&T's 6% yield is about as rock-solid as they come in the telecom space.
With AT&T reducing its operating expenses by more than $5 billion on an annual run-rate basis by the end of last year, and valued at less than 8 times Wall Street's forecast earnings for 2023 and 2024, its risk-versus-reward profile looks quite favorable.
