While Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%) doesn't pay a dividend, it's clear that CEO Warren Buffett loves companies that return cash to shareholders. Apple, Bank of America, Occidental Petroleum, American Express, and Coca-Cola are his investment conglomerate's largest stock holdings, and each of these companies pays a dividend.
While these big names account for the majority of dividend income that Berkshire receives, they're not the only promising income-generating stocks the company holds. If you're on the hunt for great investment deals, read on for a look at two other dividend-paying stocks in the Berkshire portfolio that are currently trading down more than 40% and look like great buys.
1. GM is getting the best of both worlds
Parkev Tatevosian: Down 49% off its highs in recent years, General Motors (GM -0.47%) could be an excellent Buffett dividend stock to buy right now. The company is in a strong position as it benefits from two powerful trends. First, driven by a supply shortage, GM can charge customers premium prices for the legacy cars it's selling. Profits from the first tailwind allow GM to invest billions into the second trend -- the rise in demand for electric vehicles (EVs).
As a result, GM earned an operating profit of $10.3 billion in 2022, the first time it eclipsed $10 billion in that metric in the last decade. Supply chains have improved somewhat since economies started reopening, but they are far from completely recovered. It remains to be seen how long these favorable industry trends will last, but GM will be happy to capitalize on them as long as they do.
GM Dividend Yield data by YCharts
While GM pays a modest dividend yield of 0.8% right now, if annual profits above $10 billion persist, the dividend could increase over time. Indeed, GM's dividend payout ratio was 5% most recently. That means the company is reinvesting 95% of its earnings back into the company. And with a forward price-to-earnings ratio of just 5, investors are getting this legacy automaker at a relatively inexpensive valuation. As an investor attracted to an excellent value, it's no surprise Buffett owns GM stock.
2. Verizon: Big yield and an attractive valuation
Keith Noonan: Verizon Communications (VZ 0.03%) is a cash-generating machine, and its stock trades at low earnings multiples and sports a fantastic dividend profile. With shares trading down 44% from their high, the telecom giant's stock offers a roughly 7.5% yield, and there's a good chance its dividend will continue to climb. Last September, Verizon announced its 16th consecutive annual payout increase, and the company is in a good position to deliver another dividend increase this fall.
Last year, Verizon's free cash flow (FCF) declined roughly 27% year over year to land at $14.1 billion, with the decline stemming from large infrastructure investments, pressure from inflation, and weakness in the business wireline unit. Still, FCF for the year came in well above the $10.8 billion in dividend payouts that it distributed to shareholders, and it looks like pressures on cash flow could ease this year.
Verizon has been spending billions to acquire C-Band spectrum rights to build out its 5G network, but the company sees related expenditures decreasing in 2023 and lessening pressures on FCF. Management also expects that the business will achieve between $2 billion and $3 billion in annual cost savings by 2025.
In this year's first quarter, Verizon recorded free cash flow of $2.3 billion -- up from FCF of $1 billion in last year's quarter. The big jump occurred even as the shuttering of the company's 3G services resulted in overall revenue decreasing 1.9% year over year to come in at $32.9 billion.
VZ PE Ratio (Forward) data by YCharts
With the stock trading at just 7.5 times this year's expected earnings, Verizon looks cheap at today's prices. For investors seeking solid defensive stocks serving up big dividend yield, the telecom giant stands out as a worthwhile long-term investment.
Balancing dividend growth and yield
Owning a combination of dividend-growth stocks and stocks that are already delivering big yields can be a smart move because it tends to leave the door open for both capital appreciation and income generation. With GM and Verizon posting substantial profits and looking cheap on a price-to-earnings basis, both stocks could post significant stock gains and dividend income for long-term investors and look like smart buys at today's valuations.
