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Warren Buffett is widely regarded as the greatest investor of our time. Most people don't realize that dividend investing makes up a large part of his investments. Some of his most sizable holdings pay big yields, which gives the Oracle of Omaha cash to invest in good times and in bad.
Owning companies that pay dividends is a Buffett hallmark. They 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 return (as revealed through strong returns on invested capital) and pay out excess cash flow to shareholders as dividends. Only fundamentally robust and well-managed companies can afford to give their shareholders cash every year.
In which companies does Buffett's Berkshire Hathaway invest? Well, since Buffett has more than $100 million in assets under management, he's required to detail his equity portfolio in a document filed quarterly with the Securities and Exhange Commission. Publicly available through the SEC's EDGAR website, this 13F form lets us see his holdings. His seven highest-yielding stocks are:
|
Company |
Yield |
% of Berkshire's Stock Portfolio |
|---|---|---|
|
Verizon (VZ 1.01%) |
4.4% |
0.7% |
|
General Motors (GM +0.65%) |
3.6% |
1.0% |
|
Procter & Gamble (PG +0.48%) |
3.2% |
4.0% |
|
Coca-Cola (KO +1.25%) |
3.1% |
16.0% |
|
ExxonMobil (XOM +0.90%) |
2.8% |
4.0% |
|
Wells Fargo (WFC +2.32%) |
2.7% |
22.0% |
|
Wal-Mart (WMT 0.94%) |
2.6% |
4.0% |
Source: EDGAR, company filings.
I intentionally excluded Berkshire's ConocoPhillips stake, as Buffett has called it "a major mistake of commission" and has been reducing the holding. The stake now accounts for just 0.1% of the portfolio. Conspicuously missing from this list are IBM and American Express as their yields are too low. Combined, though, they make up nearly a quarter of Berkshire Hathaway's portfolio.
Let's look at the top two on the list, which are both relatively new positions.
Verizon
At 4.36%, Verizon is Berkshire's highest-yielding stock. The telecom is also one of Berkshire's most recent investments. Berkshire first invested in Verizon in the first quarter of this year, buying 11 million shares, and then added 4 million shares to its stake in the second quarter. There's a lot to like about Verizon. The company is the largest U.S. mobile carrier by number of customers and also has the biggest LTE wireless network in the country, giving it a competitive advantage over chief rival AT&T. Early this year, Verizon completed the $130 billion buyout of the 45% stake in Verizon Wireless held by Vodafone. While it took on a significant amount of debt and sold shares to make the deal happen, the added cash flow from the acquisition should make that easily manageable.
Verizon still has room to increase its dividend. Fellow Fool Chad Henage believes Verizon's dividend could double over the next few years as the company raises its payout ratio in line with competitors. Last month, Fool Jamal Carnette took an in-depth look at why Buffett might have purchased Verizon. I think, though, the reason is simpler.
Buffett historically has purchased companies with moats at a price of 10 times pre-tax earnings. After the Verizon Wireless transaction Verizon can now be purchased for 6.5 times pre-tax earnings, easily putting it in Buffett's price range.
VZ Market Cap data by YCharts.
If the stock continues to stay priced this low, you will likely continue to see Berkshire add shares to its holding.
General Motors
At 3.6%, General Motors is Berkshire's second-highest-yielding stock. Berkshire first invested in General Motors in 2012, buying 15 million shares, and increased its stake to 40 million shares by the end of 2013. Berkshire sold 10 million shares in the first quarter of this year, but then added back nearly 3 million shares to its holdings for current total of 32.96 million shares. It's important to note that Buffett said these purchase decisions are being made by Berkshire deputy investment manager Ted Weschler.
Also worth noting is that General Motors did not pay a dividend until this year. The automaker initiated its $0.30 quarterly payout in March, before its well-publicized recall issues blew up. Buffett has said publicly that he supports new GM CEO Mary Barra and "was really impressed" when they had lunch.
Fool auto analyst John Rosevear last year gave his thoughts on why Berkshire was purchasing General Motors and recently took a deep look at General Motors' situation so far in 2014, including how the company turnaround was going amid the recall issues. In short, "GM's long-term story remains largely intact. Its newest vehicles are hugely improved; it is making progress in Europe; sales in China continue to grow; and while GM's luxury brand Cadillac has hit some bumps in the U.S., it continues to gain ground overseas."
Only time will tell if Berkshire's General Motors purchases will work out, but they fit Buffett's classic move of buying a strong company while it is undergoing short-term pain. These have worked out for Buffett before and hopefully will work out in this case.
Foolish takeaway
Buffett's dividend-paying stocks come from strong companies with wide moats. If you hold on to strong dividend companies for years, you can also turn an initial investment into a small fortune.
