Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) doesn't pay a dividend, and for good reason. Warren Buffett believes he can get investors a better-compounded return by reinvesting capital instead of distributing it. And given Berkshire's performance, he's been right.
But many companies with low organic growth don't have the opportunities that Berkshire has. Or they might think that paying a dividend is a core part of their promise to investors. Chevron (CVX 0.44%) and Bank of America (BAC -0.13%) are two of the largest Berkshire Hathaway stock holdings. And both have a dividend yield of over 3%.
Meanwhile, Berkshire-backed Vitesse Energy (VTS -1.26%) is a much lesser-known play with a yield exceeding 8%. Here's why all three stocks are worth a look, according to these Motley Fool contributors.
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A dip in oil prices provides a great entry point for investors
Scott Levine (Chevron): The fifth largest position in the Berkshire Hathaway portfolio is Chevron, one of several energy companies that the Oracle of Omaha has deemed fit for investment.
While it's not as sizable a position as it had been a few months ago (Berkshire sold about $6 billion in Chevron stock last quarter), it still figures prominently among the company's positions, representing 6% of the portfolio's holdings. The decision to pare that position, however, shouldn't dissuade investors from energizing their portfolios with the oil supermajor and its juicy 4% forward-yielding dividend.
Of all the dividend-paying energy stocks in the oil patch, what's so appealing about Chevron? The company has demonstrated a steadfast commitment to rewarding shareholders. For 36 consecutive years, Chevron has hiked its distribution to shareholders.
Should Chevron return $1.51 per share to investors in the third and fourth quarters of 2023 (as it has done in each of the first two quarters of the year), it will mean the company will have increased its dividend at a compound annual rate of nearly 4.5% since 2013.
Skeptics might question the company's ability to sustain the dividend in light of the cyclical nature of oil prices. Its 36-year track record of hiking its dividend -- during which there have been plenty of ups and downs in energy markets -- suggests management is adept at allocating capital.
And it's taking a conservative approach to leverage to ensure its financial health. As of the end of the first quarter, Chevron had a ratio of net-debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) of 0.1.
With the benchmark West Texas Intermediate crude trading at around $70 per barrel, shares of Chevron have dipped, providing investors with a great entry point. The stock subsequently is trading at a very attractive 10.4 times forward earnings, making today a great time to pick up shares and hold them for years to come.
A high-yield energy stock for income-seeking investors
Lee Samaha (Vitesse Energy): If you are looking for a passive income stock backed by Berkshire Hathaway, then Vitesse Energy is as good as you will get. The company isn't an owner/operator of oil and gas fields. Instead, its management team, led by industry veteran Bob Gerrity, acquires diverse minority interests in oil and gas assets operated by leading oil companies.
As of May, Vitesse had interests in 6,475 productive wells, primarily in the Bakken oil field in North Dakota. The operators propose and carry out the drilling and completion of the wells.
Meanwhile, according to Vitesse's Securities and Exchange Commission filings, "We assess each drilling and completion opportunity on a case-by-case basis and participate in wells that are expected to meet a desired return based upon estimates of recoverable oil and natural gas reserves."
As such, you can think of Vitesse as being, at least in large part, a play on management's ability to successfully allocate capital toward the suitable wells rather than being yet another oil-led play on energy prices. Indeed, management uses hedging to try to smooth out the volatility in oil prices, something that limits the upside from higher prices while reducing the downside.
Hedging is never an exact science, and most oil and gas investors want at least some exposure to higher energy prices, but this strategy helps give confidence that the dividend will prove sustainable if management continues to invest successfully.
Berkshire's second-largest holding is worth a look
Daniel Foelber (Bank of America): Berkshire owns many famous income-producing stocks, like Coca-Cola and Procter & Gamble -- two Dividend Kings that have paid and raised their dividends annually for over 50 consecutive years. But the issue with these companies is that growth is slowing and both stocks trade at premium valuations relative to the S&P 500.
A better value now seems to be in financial services, particularly through a stock like Bank of America, Berkshire's second-largest public equity holding behind Apple.
Bank of America stock has been under pressure for months in response to the fallout from defunct institutions like Silicon Valley Bank and the stress on regional banks. Even Buffett's partner Charlie Munger has warned about ripple effects throughout the system.
But Bank of America has a lot of things going for it. For starters, it is diversified and is far more secure than regional players. Perhaps that is why Berkshire Hathaway kept its Bank of America stake steady and sold off positions in Bank of New York Mellon and U.S. Bancorp in the first quarter.
Bank of America stock currently has a price-to-earnings (P/E) ratio near a five-year low, but its net interest income and dividend yield are near five-year highs.
BAC PE Ratio data by YCharts. TTM = trailing 12 months.
Although Bank of America tends to have a below-market valuation, a P/E ratio under 10 and a dividend yield over 3% are key levels that value investors might want to pay attention to. High interest rates are generally good for banking stocks. But an ongoing concern for banks is the declining health of the consumer, which would affect home and auto loans.
Bank of America isn't a screaming buy. But it seems like a better all-around value than other blue chip dividend stocks right now.
