It's no secret Warren Buffett loves stocks that pay dividends. Buffett himself said in his 2012 letter to Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) shareholders that "we relish the dividends we receive from most of the stocks that Berkshire owns." So if you, too, are on the hunt for income, there are three stocks in the Berkshire portfolio to consider.
The biggest bank
Any list of Buffett stocks wouldn't be complete without mentioning Wells Fargo (NYSE:WFC). It has a solid 2.5% dividend yield, and the Federal Reserve recently approved of raising its dividend 7% following its passing of the stress test. Its new yield will be about 2.7%.
Apart from its strong dividend, what are some of the reasons Buffett owns nearly 10% of this bank, or more than $25 billion worth?
Well, the first is that while Wells Fargo is in the somewhat scary banking industry, as colleague John Maxfield eloquently explains, it possesses a number of crucial differentiating factors that distance it from its peers.
First, it avoids excessive risk, which has been the harbinger of disaster for banks for the past two centuries. It's also disciplined in its management of expenses. Its efficiency ratio -- the measurement of the cost of each dollar of revenue -- stood at 58.1% in 2014, versus the 62.7% industry average for that same year.
And while that 4.5% difference doesn't sound like much, when you consider it had $84.5 billion in total revenue last year, those cost savings versus the average bank meant an additional $3.9 billion to its pre-tax bottom line.
That doesn't even take into account some of the bank's other advantages. It's a market leader across a host of categories in its commercial and consumer operations, as well as its wealth-management business. It delivers remarkable profitability relative to its peers. And it trades at a reasonable 2.4 price to tangible book value (profitability leader US Bancorp sits at 3.1). So it should come as no surprise that Buffett loves this bank and its dividend.
The hidden gem
While Wells Fargo is a household name, Suncor Energy (NYSE:SU), a Canadian integrated energy firm, is anything but.
Suncor operates principally in the Canadian oil-sands business. And while Canada may not gather the mainstream media attention of other oil operations, it's home to the world's third largest source of proven reserves. If Suncor's best estimation holds true, it could continue at its current production rate of 195 million barrels per year for the next 120 years. Talk about a wide business moat.
Of course, the recent plunge in oil prices has caused concern within the broader energy sector, but Buffett's oft-repeated phrase -- "Be fearful when others are greedy, and be greedy when others are fearful" -- bears noting in this context.
Consider the opening remarks from Steve Williams, Suncor's president and CEO, in this year's message to shareholders:
This past year has reinforced the notion that the only thing in life that's constant is change. The rapid decline in oil prices has, for some, created challenge and uncertainty. For us at Suncor, the downturn has demonstrated how a sound balance sheet, integrated model, and focused strategy can be constants that help a company not only weather a sea of change, but emerge stronger.
Yes, depressed oil prices will hurt its business in the near term, but the company has positioned itself to only benefit in the long term. It has deferred certain capital expenditures as it awaits "more favorable market conditions," but it has maintained a commitment to spending on research and development, which will only have long-term benefits.
In his wonderful book The Outsiders, William Thorndike went to great lengths to detail that the most successful CEOs and companies are those that understand how to best allocate the money they generate, whether through dividends, share repurchases, reinvestment back into their core businesses, acquisitions, or other initiatives. In short, that is exactly what Williams and his management team is dedicated to doing.
Suncor has dramatically increased the cash it has returned to shareholders over the past five years. And while it may come more in the form of repurchases than dividends in the coming months, as its share price remains depressed because of broader macroeconomic conditions, cash back in the pockets of shareholders is generally always a good thing.
The telecom titan
Last but certainly not least is Verizon Communications (NYSE:VZ), and its impressive 4.5% dividend yield. Verizon boasts industry-leading profitability, performance, and customer loyalty. In 2014, on $127 billion of operating revenue, it still it managed to boost its adjusted earnings per share by 18%.
It continues to deliver impressive gains in its customer base, and in the fourth quarter of 2014 it saw 15.3 million device activations, a 34% increase over the fourth quarter of 2013. While not as impressive, its 6.6 million FiOS Internet subscribers at the end of 2014 represented a 9% year-over-year increase.
Yes, there is some concern in the highly competitive wireless and wireline markets, but all signs indicate, to the delight of shareholders, that Verizon isn't going anywhere anytime soon.
Stocks that pay dividends have proved time and again to outperform non-dividend-payers, so it's no wonder Buffett likes them so much. These three are certainly worth your time and consideration.