There are plenty of good reasons to buy a dividend stock, and who's better to learn from than Warren Buffett himself. As of this writing, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) owns 30 dividend-paying stocks in a variety of industries. Here's what Warren Buffett looks at when deciding which dividend stocks to purchase, and how you can apply this information to your own portfolio.
Buffett's dividend stocks
There's no way of knowing Buffett's entire process of picking stocks, but we do know that there are some things he likes to see. Just to name a few, Buffett looks for:
- Little or no debt
- A strong history of growth, in terms of profits and revenue
- Shareholder-friendly management that prioritizes dividends and share buybacks
- A relatively low payout ratio (dividend as a percentage of earnings)
Perhaps most importantly, Buffett looks for a "wide economic moat." This refers to an identifiable competitive advantage that should allow the company to thrive for decades to come. For example, Coca-Cola (NYSE:KO) has a world-class distribution network and one of the most valuable brand names in the world. The brand name gives the company pricing power (this is why we pay more for Coca-Cola than generic soda) and the distribution network allows the company to get its products where they need to be in a more efficient manner than competitors.
How to use this information
Now, I'm not saying that you should buy these specific stocks for your portfolio. Rather, my point is that there is a clear "type" of dividend stock that makes a good long-term investment, and more importantly, many kinds of dividend stocks that have no place in a low-risk long-term stock portfolio.
Specifically, you'll notice that Buffett doesn't go after the highest-yielding dividend stocks -- far from it. For example, there are plenty of oil companies that pay more than Suncor Energy's (NYSE:SU) 3.14% yield, especially after the recent drop in oil stock prices. However, Suncor has a diverse revenue stream, cost advantages over many of its peers, and a sound management team -- all of which are much more important than the dividend yield itself.
With this in mind, here are the 10 highest-yielding stocks in Berkshire Hathaway's portfolio, and a bit about why Buffett likes each one.