Warren Buffett's record of building wealth makes the holdings of his company, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), a no-brainer place to look for investment ideas. Berkshire's portfolio is full of top consumer brands that generate consistent revenue and profits and pay out dividends to shareholders.
Keep in mind that not all the stocks Berkshire owns were picked by Buffett. Many of the smaller holdings were the handiwork of Berkshire's investing lieutenants, Ted Weschler and Todd Combs, who oversee a portion of the conglomerate's portfolio. Nonetheless, Weschler and Combs have equally impressive investing careers worth following.
That said, all of Berkshire's stocks are worthy of further inspection, and some would make great dividend investments. Apple (AAPL -0.35%), Kraft Heinz (KHC -0.55%), and Kroger (KR -0.75%) are three dividend payers that could deliver great returns from here, according to three Motley Fool contributors. Let's find out more about these three stocks.
Apple is Buffett's favorite
Jeremy Bowman (Apple): With a dividend yield of 0.5%, Apple isn't going to win any awards for yield, but this tech giant has a long track record of raising its dividend and rewarding investors (including with share buybacks).
Additionally, it has one of the widest economic moats in the business world, making it obvious why Buffett is so fond of the business. In fact, Apple now makes up roughly half of Berkshire's stock portfolio thanks to steady buying over the years and Apple's own stock appreciation.
The iPhone and Mac maker has built an unrivaled consumer tech ecosystem with an installed base of roughly 2 billion devices. Once you own one Apple product, it makes sense to buy more if you're in the market for another because they work seamlessly with one another and connect to software like iCloud and the App Store.
Apple's introduction of its new Vision Pro spatial computing headset at its Worldwide Developers Conference in June also puts it in a position to dominate the next era of computing.
While it's unclear yet if headsets like the Vision Pro and Meta Platforms' Quest will gain broad adoption, Apple seems like a good bet to be a leader in spatial computing considering its reputation for consumer hardware, integrations with devices like the iPhone, and the years of research and development that have gone into the device. Priced at $3,500, the Vision Pro is much more expensive than the Quest.
The tech titan has also been applying artificial intelligence (AI) tools like machine learning, meaning the company offers one of the best use cases for AI right now as well. Meanwhile, its market share continues to grow, further entrenching its leadership.
You can rest assured that Apple will deliver monster profits for years to come.
A high-yield food stock
John Ballard (Kraft Heinz): Buffett has a long history of favoring top consumer names, so it's no surprise that Berkshire Hathaway's portfolio is full of some of the biggest brands in the world, including Apple, Coca-Cola, and Kraft Heinz.
Kraft Heinz is more than mac and cheese and ketchup. The company also owns other top brands like Philadelphia and Lunchables. These also happen to be some of the company's strongest performers, driving an 8% year-over-year increase in organic sales in the first quarter. The business is also executing a successful international strategy, with organic sales surging 23% year over year.
It's not all good news. Kraft has struggled to maintain volume growth in the high-inflation environment, as all of its growth was driven by price increases last quarter. Still, the price boosts have been a valuable tool to keep profits up. Margins have been trending up, leading to a 13% rise in adjusted earnings per share last quarter.
Kraft Heinz offers an attractive above-average yield of 4.6% at the time of this writing, although this was only made possible by the company paying out 130% of its free cash flow in dividends over the last year. Paying out more cash than you bring in is not sustainable over the long term.
Part of the problem has been higher inventory levels, which decreased free cash flow produced by the business. Management is working to reduce inventory, so investors should expect free cash flow to recover over the next few years, and sustain the current dividend payout.
The stock is also trading at a cheap forward price-to-earnings ratio of 12, so growing earnings and free cash flow could be a catalyst for the shares.
The stock might outperform if the market decides the business is worth a higher P/E multiple, but I wouldn't buy shares with hopes of making big returns. This isn't a fast-growing business, but Kraft Heinz could be an undervalued dividend stock worth considering ahead of the next bull market.
Fresh food and digital shopping equal higher sales
Jennifer Saibil (Kroger): Investors love growth stocks and for good reason. They're often the driving force behind incredible portfolio gains. And that's what investing is all about, isn't it? Not exactly. That's because stocks with the highest opportunity for gains also typically come with the greatest risks. For most investors, the best way to benefit from growth opportunities while mitigating risk is to create a diversified portfolio with both growth and value stocks.
Then there are investors like Buffett. He's embraced a value approach to investing and tends to steer clear of growth stocks, and yet Berkshire has regularly beaten the market over many years.
One of his value plays is Kroger. Kroger is the second-largest supermarket chain in the U.S. in terms of store count behind Walmart, with over 2,700 stores in 35 states. It operates under the Kroger brand as well as several other smaller brands like Harris Teeter, Fry's, Dillons, Fred Meyer, and Ralphs.
Growth was stagnating before the pandemic. The grocery specialist took too long to get into the digital arena, but it jumped into gear at the beginning of the pandemic and sales exploded. With a new strategy in place emphasizing fresh food and omnichannel shopping, Kroger is demonstrating momentum. Its company-branded food lines, which are high quality at lower prices, have become very popular, presenting a strong growth opportunity. Comparable sales growth dropped after the early pandemic surge, but it's now back to steady increases. In the first quarter of 2023, comparable sales (without fuel) climbed 3.5% over last year, while earnings per share rose from $0.90 last year to $1.32.
Kroger pays a dividend that yields an above-average 2.2%, and it has increased its payout 287% over the past 10 years, or more than double other dividend superstars like Coca-Cola and PepsiCo.
Kroger trades at the cheap valuation of 13 times trailing-12-month earnings. Between its dividend increases and low valuation, as well as its position as an all-seasons essentials company, it's easy to see why Buffett likes this stock, and how it can shore up a diversified portfolio with value and safety.
