Rather than pay a dividend to shareholders, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett prefers his company to use cash to invest in and acquire businesses and fund stock buybacks. But that doesn't mean The Oracle of Omaha isn't a big dividend fan.
In fact, each of the top 10 holdings in the investment conglomerate's $380 billion stock portfolio pays dividends -- and 55.3% of its total portfolio weight is invested in just two dividend-paying companies. Read on as two Motley Fool contributors explain why Buffett (through Berkshire) has bet so big on these two dividend stocks.
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Apple's customer loyalty is a valuable commodity
Parkev Tatevosian: Apple (AAPL -0.35%) is not often thought of as a dividend stock. Most investors still focus on the growth stock and tech stock aspects of this company. But Apple does pay out a regular dividend and it has more than doubled its per-share payout over the past 10 years.
It's also not likely that dividends are the main reason the stock is such a big part of Buffett and Berkshire's portfolio (roughly 46% of the portfolio is Apple stock). This stock likely attracts Buffett more for its share price appreciation. The passive income from this low-yield stock is more of a cherry on top for Berkshire. Although it is fair to say that the Oracle of Omaha appreciates the passive income Apple stock provides and the fact that it's growing.
Between 2013 and 2022, Apple's per-share dividend more than doubled, going from $0.41 to $0.90. More importantly, Apple's earnings per share increased by a compounded annual rate of 14.5% in that period. Why is that important? Because earnings are crucial to dividend payments. Without sufficient profits, dividends must be paid from unsustainable sources like savings or debt.
Considering that Apple has built strong loyalty among consumers over several decades, it's reasonable to assume that it can continue to grow earnings, even at a slower pace than in the previous decade. Additionally, Apple's ecosystem of apps, services, and hardware makes it difficult for customers to switch brands. The savvy investor that he is, Buffett understands the value of customer loyalty.
AAPL PE Ratio (Forward 1y) data by YCharts
Warren Buffett has 46.4% of his portfolio allocated to Apple stock. With Apple's forward price-to-earnings ratio of 29.2, the stock is admittedly pricey. I would not advise investors to distribute a similar share percentage in their portfolios. That said, a diversified portfolio that includes Apple stock has a reasonable chance of increasing your wealth in the long run.
Buffett helped save this company and reaped the dividends
Keith Noonan: Warren Buffett has had an up-and-down (and up again) relationship with Bank of America (BAC -0.21%). After building a position in the banking giant's stock for Berkshire's portfolio, The Oracle of Omaha liquidated his company's entire position in the banking giant at the end of 2010. Lingering challenges stemming from the 2008 banking crisis and the Great Recession were pressuring Bank of America's performance, and Buffett had lost confidence in the stock.
But as Bank of America struggled in 2011, Buffett contacted the company's CEO to discuss a potential investment that could help the bank raise capital and avert looming financial issues.
In addition to buying $5 billion worth of Bank of America preferred stock, Buffett wound up receiving warrants to purchase up to 700 million shares of the company's common stock at a price of $7.14 per share. With BofA trading at roughly $23.50 per share in June 2017, Buffett exercised the warrants.
The move immediately made Berkshire Bank of America's largest shareholder, and it remains so to this day. Buffett's company owns roughly 13% of Bank of America, and its stock accounts for 8.9% of Berkshire's total stock portfolio.
Since the warrants were exercised, the company has also doubled its dividend.
BAC Dividend data by YCharts
BofA stock currently has a forward yield of roughly 2.9%, and there's a good chance that investors who buy shares at today's prices will be able to enjoy elevated yield down the road. Earlier this month, the company raised its quarterly payout from $0.22 per share to $0.24 per share. With the upcoming payout, the banking giant will have raised its dividend on an annual basis for 11 straight years.
Business performance has also been strong as of late. Spurred by higher interest rates and an influx of business following the collapse of some regional banks, Bank of America's revenue climbed 11% year over year in the second quarter to $25.2 billion. Meanwhile, net income was up 19% year over year to reach $7.4 billion.
Economic cycles will continue to have a significant impact on BofA's performance, but it's clear that Buffett has confidence in the company's long-term outlook. Berkshire once again increased its stake in Bank of America in Q1, and there's a good chance the financial giant will remain the investment conglomerate's second-largest holding for years to come.
