Berkshire Hathaway's Warren Buffett is widely regarded as the greatest investor of our time. What's not well-known is that dividend investing makes up a large part of his investments. Some of his largest holdings pay big yields, which gives the Oracle of Omaha cash to invest in good times and in bad.
Owning dividend companies is a hallmark of Buffett's. These stocks fall straight in line with his strategy of owning fundamentally strong companies whose business models provide inherent advantages against competitors -- otherwise known as "moats." Such companies can consistently reinvest cash flow at high rates of returns (as demonstrated by a high return on equity) and pay out excess cash flow to shareholders as dividends. Only fundamentally strong and well-managed companies can afford to give their shareholders cash every year.
So what companies does Buffett invest in? Well, since Buffett is an asset manager with more than $100 million in assets under management, he's required to detail his equity portfolio in a document filed with the SEC called a 13-F. The public filings available through the SEC's EDGAR website let us examine Berkshire Hathaway's holdings.
Here are his highest yielders:
|
Company |
Yield |
Return on Equity (TTM) |
|---|---|---|
| GlaxoSmithKline (NYSE: GSK) | 5.2% | 36.3 |
| M&T Bank (NYSE: MTB) | 3.8% | 10.7 |
| ConocoPhillips (NYSE: COP) | 3.6% | 17.0 |
| Johnson & Johnson (NYSE: JNJ) | 3.4% | 20.2 |
| General Electric (NYSE: GE) | 3.3% | 11.6 |
| Kraft Foods (NYSE: KFT) | 3.3% | 8.5 |
| Procter & Gamble (NYSE: PG) | 3.2% | 18.2 |
Source: EDGAR filing on Aug. 15. TTM = trailing 12 months.
Let's take a closer look at what's on the list.
Pharma
Buffett invested in GlaxoSmithKline and Johnson & Johnson as investors grew worried about the companies' dwindling drug pipelines. However, investors are overlooking their cash hoards, distribution networks, and experience working with the FDA, which are invaluable moats that allow them to ward off new upstarts and continually post large profits.
- Add Johnson & Johnson to My Watchlist.
- Add GlaxoSmithKline to My Watchlist.
M&T Bank
M&T Bank is one of three banks that make up almost 20% of Buffett's portfolio. While M&T doesn't look particularly cheap at 1.1 times book value, the company consistently does well, earning a higher return on its book value than its average competitor. The company also consistently returns cash to shareholders and currently is trading with a 3.8% yield, the highest it's been since last January.
- Add M&T Bank to My Watchlist.
ConocoPhillips
Buffett has called his investment in ConocoPhillips "a major mistake of commission." The Oracle of Omaha bought shares before the collapse of oil prices in 2008. While the investment was a mistake, Buffett's downside has been somewhat protected by the company's large dividend. ConocoPhillips shares have risen in the past year, though they are still 30% off the levels reached in 2008. One big positive for the stock: Last month, the company announced it would separate its exploration and production business from its refining business. Spinoffs have a history of outperforming the market, and this one looks promising, given Marathon Oil's recent successful similar spinoff. At $66, the price is far more attractive than 2008's $95 share price; you also have a potential catalyst with the upcoming spinoff; and you get a 3.6% dividend. There's a lot to like about ConocoPhillips.
- Add ConocoPhillips to My Watchlist.
General Electric
General Electric is a diversified machine that has consistently paid a dividend, earning those who have stuck with the company and reinvested their dividends very well off. Buffett made a large cash infusion in General Electric to help it overcome problems with its financial unit, a deal that has rewarded him handsomely. While the market wasn't happy with GE's recent earnings, there's a lot to like. GE has been expanding into the energy market with some success, and its industrial core has been doing well with its backlog at a record $189 billion. At today's price, you are paying less than 13 times for a company expected to grow 14.6% per year over the next five years, and you get a 3.3% dividend to keep you happy. What's not to like?
- Add General Electric to My Watchlist.
Consumer stocks
Buffett had protested Kraft acquiring Cadbury, but the deal went through all the same. Buffett has held most of his shares, and he'll likely be rewarded now that Kraft has announced plans to split up its North American grocery business from its snacks and candy business. The nice thing about this one is that while you wait for the spinoff, you can also collect the dividend, which is currently yielding 3.3%.
There's a lot to like about Procter & Gamble. The company is one of the best consumer staples companies in the world, with international markets making up 60% of P&G's sales and with its lineup touting many of the most recognizable household brands. Shareholders also benefit from a large dividend, currently yielding 3.2%, that it has paid since 1890 without interruption.
- Add Kraft Foods to My Watchlist.
- Add Procter & Gamble to My Watchlist.
Foolish takeaway
In each case, Buffett's dividend-paying stocks are strong companies with wide moats, allowing them to pay dividends for years. If you hold on to strong dividend companies for years, you can also turn an initial investment into a small fortune. Consider the seven stocks above along with the 13 names from a free report from Motley Fool's expert analysts called "13 High-Yielding Stocks to Buy Today," including one named by a senior retail analyst as "the dividend play of a lifetime." Tens of thousands have requested access to this report and today I invite you to download it at no cost to you. To get instant access to the names of these 13 high yielders, simply click here -- it's free.
