3 Warren Buffett Dividend Growth Stocks to Buy Now and Hold Forever

Warren Buffett loves a good dividend stock. What he loves even more, though, is a stock that can consistently increase its dividend over time.

Case in point: Buffett first purchased shares of Coca-Cola (KO) for Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) portfolio in 1988, when the stock offered a dividend yield of 2.9%. After 35 years, shares pay $1.84 every year, yielding 70% on Buffett's original investment.

Investors would be smart to pay attention to some of the lower-yielding dividend payers in Buffett's portfolio with massive potential for dividend growth. Here are three of them to consider.

1. T-Mobile

Berkshire Hathaway bought shares of T-Mobile (TMUS -0.06%) before the company even paid a dividend. In fact, the wireless telecom company just declared its first dividend earlier this year, and it has yet to pay it to shareholders. But there's a lot of potential for T-Mobile to raise its payout over time.

The company declared a $0.65 quarterly dividend on Sept. 25, payable on Dec. 15 this year. That gives the stock a yield of around 1.8% at the time of this writing.

But when management announced its latest capital return program, it also outlined its longer-term plans for the dividend: "The dividend amount paid per share is expected to grow by around 10% annually." So investors can expect a nice bump to their payments every year for the foreseeable future.

More importantly, T-Mobile is setting itself up well to support those dividend payments.

For starters, it's committing just $3 billion to the dividend per year. Meanwhile, it expects to generate around $18 billion in free cash flow next year.

On top of that, it's using the bulk of its shareholder return program funds to retire shares: $15.25 billion will go toward repurchasing T-Mobile stock, which means fewer shares to pay dividends on. In fact, if T-Mobile executes its share repurchase authorization around the current share price, T-Mobile will be able to raise the dividend by about 10% per share without actually increasing the total amount it distributes to shareholders.

With the company planning to continue retiring shares in 2025 and 2026, T-Mobile investors will have a long runway for dividend growth. It's no wonder T-Mobile is Buffett's favorite telecom stock.

2. Visa

Visa's (V -0.23%) dividend yields less than 1% at its current share price, but don't let that tiny number fool you. The payments network provider has increased its dividend every year since first declaring one in 2008. Investors who bought shares of the stock when Visa declared its first small dividend would be generating a yield of around 9% on their original investment today.

Buffett first bought shares of Visa in 2011, and he's seen the payout climb considerably over the past 12 years. However, the next 12 years could still produce strong dividend growth for investors buying today.

Visa returns a huge percentage of its free cash flow to shareholders, but it primarily does so through share repurchases. Last year, it generated $17.9 billion in free cash flow. It distributed just $3.2 billion of that to shareholders via dividends and used $11.6 billion to buy back shares. The board authorized a $12 billion stock repurchase program at the start of the year while committing to a $0.45 per share quarterly dividend.

In other words, Visa has a lot of room to keep increasing its dividend, even if it doesn't increase its cash flow by shifting more of its capital return program to the dividend. But investors should expect continued free cash flow growth as more and more payments shift from cash to electronic methods, where Visa holds a dominant position and benefits from scale.

3. Costco

Costco (COST 1.01%) may be considered an honorable mention on this list. Buffett sold Berkshire's stake in the warehouse club in 2020. That said, Buffett's right-hand man, Charlie Munger, still owns about $100 million worth of shares.

Costco pays a regular quarterly dividend that management has increased every year since it was first declared in 2004. Still, the shares yield less than 1% at today's stock price based on its quarterly dividend. Costco also pays out occasional special dividends to deliver excess cash to shareholders. Those have generally come every two to three years, with the last special dividend paid at the end of 2020.

Importantly, there's a lot of room for Costco to grow its dividend. With its quarterly dividend of $1.02, its payout ratio is just 26% of analysts' earnings expectations for fiscal 2024. At the same time, Costco sports a strong cash position. It has more cash than debt on its balance sheet, a rarity for brick-and-mortar retailers.

That said, Costco is still committed to putting its cash to work in expanding its footprint. It costs a lot to open a new warehouse. Still, cash from operations is climbing at a faster pace than capital expenditures, leading to expanding free cash flow. Investors should expect that trend to continue as Costco manages to get more out of each warehouse over time while keeping the pace of new warehouse openings steady. That should give management plenty of runway (on top of its low payout ratio) to keep giving shareholders substantial dividend raises every year.