Warren Buffett has long advocated dividend stocks. Last year, his Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) generated $6 billion in dividends, up roughly 20% from $5 billion in 2021. Buffett's affinity for dividend stocks reflects his preference for companies that exhibit strong fundamentals, generate consistent profits, and distribute a portion of their earnings to shareholders.
Here are three stocks that make up roughly 58% of Berkshire's portfolio and could provide you with a lifetime of passive income.
1. Apple
During Berkshire's most recent annual meeting, Buffett described Apple (AAPL -0.81%) as a "better business than any other we own [outright]." A sentiment like that is probably why Berkshire owns a whopping $150 billion in Apple shares, making up 46% of its stock portfolio.
The largest tech company in the world has paid and raised its dividend every year since 2012. Its current quarterly payout is $0.24 per share, generating a yield of 0.55%.
Beyond its dividend, Apple returns an extraordinary amount of capital to shareholders through share repurchases. Over the past five years, the company has lowered its split-adjusted share count from roughly 20 billion to 15.8 billion, a decrease of 21%.
This aggressive capital allocation strategy constantly removes shares from circulation, making existing shares more valuable. It recently announced the authorization of $90 billion in share repurchases in addition to its $23 billion program.
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If Apple stock has a downside, it's unquestionably the valuation. The price-to-earnings (P/E) ratio is roughly 29, exceeding its five-year average of 24.7. Still, the high valuation stems from its remarkable performance; it has handily beaten the S&P 500 over the past 12 months as well as the previous three, five, and 10 years.
2. Coca-Cola
Buffett hasn't bought a share of Coca-Cola (KO 0.78%) since 1994, but it remains one of his favorite investments. Here's why: In 1994, Berkshire completed its $1.3 billion investment into the company. Since then, that investment has grown to $25 billion, and Berkshire received a remarkable $704 million in 2022 solely from the dividend.
Today, Coca-Cola has a market cap of $263 billion and pays a quarterly dividend of $0.46 per share, representing a yield of roughly 3%, surpassing the S&P 500's 1.6% yield. And it has increased its dividend annually for 61 consecutive years, making it a member of the elite group of Dividend Kings.
The company consistently generates positive free cash flow, underscoring its ability to sustain those dividend payments. For 2023, management guided for $9.5 billion in free cash flow, which will cover its expected $8 billion in dividends.
As for the bear case, Coke has $28 billion in net debt (long-term debt minus cash) and is in an ongoing $3.4 billion tax dispute with the U.S. government. While management feels good about its debt position, it could become a more significant burden if high interest rates persist.
Nonetheless, Coke is an institution worldwide, and it will likely continue its dominance in the soft drink industry for the foreseeable future.
3. Kraft Heinz
Berkshire Hathaway owns roughly 26.5% of Kraft Heinz (KHC 0.85%) and has lost billions since it initiated the position in 2015. Still, Buffett has called the food company a "fabulous business" and hasn't sold any shares even though the stock price has fallen and the dividend has been slashed.
So, why does he still believe in Kraft Heinz? It's because the company's products are staples in most households, and it's profitable -- generating $2.4 billion in net income over the trailing 12 months. The company also pays a quarterly dividend of $0.40 per share, for an outsize yield of 4.2%.
As mentioned, Kraft Heinz cut its dividend in 2019 and hasn't raised it since, but that was necessary to pay down its debt. To management's credit, it has done precisely that, lowering its net debt from its peak of roughly $29 billion in 2019 to $19 billion.
Kraft Heinz was ahead of the curve in cutting its debt and is in a better position than companies that are just starting to shore up their balance sheets.
Are these Buffett dividend stocks buys now?
Dividend stocks have a remarkable tendency to exhibit lower volatility than growth stocks and to outperform them as well. These three Warren Buffett stocks present attractive dividend prospects and hold dominant positions within their respective industries, making them worthy additions to any long-term portfolio.
