If you want to achieve legendary stock market returns, following Warren Buffett's best moves is a great way to make that happen. Shares of Berkshire Hathaway (BRK.A 0.63%)(BRK.B 0.58%), the holding company he's managed since 1965, have risen by about 3,337,720% in his years at the helm.
Buffett, though, would be one of the first to tell you that blindly following his actions isn't recommended. Not all of Berkshire's big bets have worked out as well as hoped, and some have been real stinkers.
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There are plenty of complicated ways to select likely winners from Berkshire Hathaway's overall portfolio. Looking for dividend payers that regularly raise their payouts, though, is a relatively easy method that's a lot more effective than you may think. From 1973 through 2022, non-dividend paying stocks in the S&P 500 index fell by an average rate of 0.6% annually, according to research from Ned Davis and Hartford funds. Dividend growers and initiators, by contrast, rose by 10.2% annually over the same period,
Here are two dividend-paying Buffett stocks that offer yields that are already way above the 1.7% you'd receive from the average dividend payer in the S&P 500 index. Best of all, both have what they need to continue raising their payouts in the near term and for many years to come.
NYSE: ALLY
Key Data Points
Ally Financial: 4.5% yield
Ally Financial (ALLY 1.35%) is easily America's largest and oldest all-digital bank. As the former financial arm of General Motors, its roots stretch back over a century. At the end of December, 2.7 million retail depositors were keeping roughly $137.7 billion worth of deposits at Ally.
Despite the pandemic's damaging effects on car sales, the past few years have been outstanding for Ally and its shareholders. The company has been able to raise its dividend payout by 275%, and further raises in line with earnings growth shouldn't be an issue. The company needed less than 15% of its free cash flow last year to meet its dividend commitment.
Auto loans remain a big part of Ally's business, and the average yield on new loans shot up by 2.6 percentage points year over year to 9.57% in the fourth quarter. The total value of auto loans originated in the fourth quarter fell by $1.7 billion, but Ally's wider net interest margin helped make up the difference.
Ally Financial shares currently trade at a bargain level of just 5.4 times earnings. Buying in at this low valuation, long-term investors will come out miles ahead even if earnings stagnate.
Despite a disappointing 2022, Ally's earnings have more than doubled over the last five years. There are no guarantees, but it's hard to imagine this bank reporting sustained earnings contractions in the years ahead.
NYSE: JNJ
Key Data Points
Johnson & Johnson: 2.7% yield
Johnson & Johnson (JNJ 0.19%), or J&J as it's commonly known, practically invented the consumer healthcare market over a century ago, and its iconic brands still generate billions in annual revenue. In recent years, though, the company's medical technology and pharmaceutical segments have provided it with a lot more growth.
It's been more than 60 years since J&J went more than a year without raising its dividend payout. Investors who buy the stock now can look forward to continued payout raises -- plus a two-for-one deal. To allow the company to focus on the parts of its business that are growing the fastest, J&J will spin off its consumer health division into a separate company to be named Kenvue later this year.
The J&J that remains will likely pay a smaller dividend next year. But the combined distributions from J&J and Kenvue should add up to a significantly larger sum than shareholders receive at the moment.
J&J's present valuation of 15.7 times forward-looking earnings estimates is low enough that investors who buy the stock now will likely come out ahead over the long run if earnings creep forward annually at low single-digit percentages. After adjusting for the negative effects of a strengthening dollar, pharmaceutical sales grew 6.7% and medical technology sales rose 6.2% last year.
Given the present pace of growth and its planned streamlining, this is one of the more reliable dividend-paying stocks you can buy right now.
