Warren Buffett loves a good dividend growth stock. Such companies consistently grow their profits year after year and elect to return those higher profits to shareholders.
A business that's able to do that likely has a lot of the characteristics Buffett looks for in a company. And when those stocks trade at a fair value, they can provide exceptional returns for shareholders.
Dividend growers and initiators generated an average return of 10.24% in the 50 years from 1973 through 2022, according to research from Hartford Funds. By comparison, non-payers grew just 3.95%. That might help explain Buffett's uncanny performance as CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), substantially outperforming the S&P 500 index in that same period.
The great news is that you can copy Buffett's strategy. Berkshire Hathaway's stock portfolio is publicly available thanks to required Securities and Exchange Commission disclosures. Here are three dividend growth stocks in the portfolio you can buy now and hold forever.
Image source: The Motley Fool.
1. Apple
Buffett first bought shares of Apple (AAPL -0.35%) in 2016, and it's grown to become Berkshire Hathaway's largest equity holding by far.
It's easy to see why Buffett is a fan of Apple and its dividend. The iPhone is a cash-generating machine. Apple's dominance of the premium smartphone space is unlikely to change anytime soon, and its ability to generate more and more revenue from each user over time through its growing services business is fueling its bottom-line growth.
Apple has a generous capital return program. It reinstated its dividend in 2012 after suspending it in the mid-1990s. It has since raised its dividend every year.
More impressive, however, is its share repurchase program. The company has bought back over $600 billion worth of its own shares over the last decade. That has supported strong earnings-per-share growth and given investors confidence in the stock price.
Management intends to reach net cash neutral over time, where the cash on its balance sheet equals the amount of debt it holds. It currently holds net cash of about $45 billion. On top of that, it now generates around $100 billion in free cash flow annually. So, there are likely to be a lot more dividend increases in the future as Apple aims to return most of its cash to shareholders.
The stock currently trades at a premium price of around 32 times forward earnings estimates. But given its massive share repurchase plan and substantial net cash position, it deserves to trade at a premium. Despite the high price, dividend growth investors should consider shares of Apple for their portfolio.
2. Visa
Buffett has held shares of Visa (V -0.23%) in Berkshire's portfolio for over a decade. Not only has the stock outperformed the market in that time, but Visa has also raised its dividend every year since.
Visa benefits from a classic competitive advantage -- a big focus for Buffett in his analysis of a business. The payment network is the largest in the world, making it a top choice for banks looking to issue a new credit card, especially one accepted internationally.
The only other network that comes close is Mastercard, another Berkshire holding. A company trying to build a payments network from scratch will take years, maybe decades, to come close to the reach of Visa or Mastercard.
The ongoing shift away from cash and toward digital payments is a major boon for Visa. Since it's already done the hard work of setting up the payment network, the pennies Visa takes from each extra dollar transacting on its rails practically go straight to its bottom line.
Management returns almost all of its growing free cash flow to investors through its dividend and share repurchase program. And the capital return program still leans heavily toward buying back shares. The board recently authorized $25 billion in multiyear share repurchases. By comparison, it paid just $3.75 billion in dividends last year.
But with nearly $20 billion in annual free cash flow, there's plenty of room to increase the dividend, just as it's done each year since going public in 2008. The shares currently trade for a forward P/E of just 26, a discount to its historical valuation as well as its smaller rival Mastercard (which trades for about 30 times forward earnings).
3. T-Mobile
T-Mobile U.S. (TMUS -0.06%) is a relatively recent addition to Berkshire Hathaway's portfolio. Buffett first purchased shares in 2020, following the merger with Sprint.
The merger gave T-Mobile important spectrum assets to fuel its 5G network buildout, helping it become a leader among wireless network operators. That's led to sustained market share gains, rising average revenue per account, and a burgeoning home internet business.
But the real story for T-Mobile is its free-cash-flow (FCF) growth. It generated over $4 billion in adjusted FCF last quarter, and it expects to produce between $13.4 billion and $13.6 billion in FCF for the full year. Next year, management has its eye on $18 billion in FCF. That will put it on par with its older competitors in the space as they work to catch up with T-Mobile's network while paying down debt.
T-Mobile's strong FCF growth has allowed it to buy back shares at a substantial pace. It announced a $14 billion share repurchase program in late 2022 and added another $19 billion in total shareholder returns in September 2023.
The latter authorization includes a new dividend that management intends to grow at an annual pace of 10% for the foreseeable future. And with its strong FCF outlook and substantial buybacks underway, there's no reason to doubt its ability to keep that promise.
With shares trading at less than 16 times analysts' estimates for 2024 earnings despite a strong earnings growth outlook, T-Mobile shares look like a great opportunity for investors.
