There’s probably never been a greater investor than Warren Buffett. The third richest man on the planet is the only one who has made it big purely through investing in companies. So, it helps to learn a little from his annual stock holding disclosures at Bershire Hathaway. In August, 2016, the company released a 13F filing, which basically covers what was bought, sold and held from the massive portfolio of the public company.
Here’s what we learnt:
Buffett Loves Dividends
Buffett seems to focus on high-income stocks that beat bond yields. High dividend stocks buffett prefers usually have great cash flows and a long history of consistency. We’ve seen before how consistently high dividend payments can really help you create a rock-solid dividend portfolio. Most of the theories we discussed come from observations of Berkshire Hathaway’s portfolio.
Buffett believes (rightly) that dividends form a substantial proportion of overall stock market returns. Over the course of history, nearly half of the S&P 500’s returns have come from dividends that were paid out and reinvested. Buffett has always preferred a well-managed company that earns a lot, has decent cash flow, and growing dividends.
Over time his strategy has been refined and adjusted for the booming size of his company. His latest filing show a collection of high quality blue chip companies that can promise some serious returns in the form of dividends. 92% of the entire portfolio pays out dividends. His four biggest holdings yield an average of 3.1% a year. These top four positions are also well-concentrated, making up about two-thirds of the entire portfolio. Many of the companies on the list not only pay high dividends, but have been growing their rates of dividends for multiple decades.
This consistency and earning power is what attracts Buffett and is essentially what the average income-seeking investor must look for.
Buffett’s Top 20
As per the filings, here are the top 20 high dividend stocks buffett picked:
- Bank of New York Mellon (BK): 1.9% dividend yield
- Apple (AAPL): 2.4% dividend yield
- Kinder Morgan (KMI): 2.7% dividend yield
- U.S. Bancorp (USB): 2.5% dividend yield
- M&T Bank Corporation (MTB): 2.4% dividend yield
- Johnson & Johnson (JNJ): 2.6% dividend yield
- The Kraft Heinz Company (KHC): 2.6% dividend yield
- Wal-Mart (WMT): 2.7% dividend yield
- United Parcel Service (UPS): 2.9% dividend yield
- General Electric (GE): 2.9% dividend yield
- Procter & Gamble (PG): 3.1% dividend yield
- Suncor Energy (SU): 3.2% dividend yield
- Deere & Company (DE): 3.0% dividend yield
- Wells Fargo & Company (WFC): 3.2% dividend yield
- Coca-Cola (KO): 3.1% dividend yield
- Phillips 66 (PSX): 3.4% dividend yield
- IBM (IBM): 3.6% dividend yield
- Sanofi (SNY): 4.1% dividend yield
- Verizon (VZ): 4.0% dividend yield
- General Motors (GM): 5.1% dividend yield
Many of these are well-known brands that have a stellar record. IBM, for example, is the oldest tech company in the country. It’s been making humongous profits since before Apple or Microsoft were even started. Now the company pays out a vast portion of the cash it generates every year in the form of dividends.
You’ll notice that many of the top twenty high dividend stocks buffett picked return more than the US treasury bond yield (currently 2.3%). The minor exception to that is BNY Mellon, which has underperformed in terms of growth and dividend payouts over the past few years. But investors should be aware of the growth potential for stocks that are currently yielding low returns.
Then there are stocks which has deceptively low returns, like Apple. The iPhone and Mac maker has been returning tremendous amounts of cash every year and is sitting on a massive cash hoard of $237.6 billion. Yet, the dividend yield seems to barely keep pace with US treasury bonds. That is until you account for the stock buyback program, which brings the overall yield to more than 5%. At a price-to-earnings ratio of barely 12.7, the world’s most profitable company is available at a steep discount to those seeking value.
Of course, some of the highest yielding stocks on the list have been there for decades. Wells Fargo and Coca Cola have both been really impressive high dividend stocks buffett has believed in for years. Wells Fargo yields over 3% since the account scandal pushed down the stock’s price, while the dividend payout remained the same. WFC is a massive holding at Bershire. It’s one of those high dividend stocks buffett has allocated 17.55 of his portfolio to. Similarly, Coca Cola forms 14.4% of the portfolio and yields 3.2% in dividends.
There’s much to be said about the two highest yielding stocks on the list – Verizon and General Motors. They each yield 4.3% and 4.8% respectively, but form a very small part of the overall Berkshire Hathaway portfolio. General Motors is little over 1% while Verizon is just under 0.7% of the holding. There’s a good chance GM is part of the portfolio purely because of how cheap it is. It’s not expected to show stellar growth over the long-term, but it’s priced at 4.1 times earnings and the dividend yield is extraordinarily high.
Verizon, meanwhile, is a telecom company with a massive cash hoard. It controls one-third of the US telecommunications market. In fact, the telecom industry is highly concentrated, with only four companies accounting for 90% of the revenues. This is bad for people who use the service, but really good for the businesses in the top four (such as Verizon). Over the past ten years, the company’s earnings-per-share have grown at an annual rate of 7.5%. Trading at 14.9 time earnings is not justified for such an efficient company in such a good industry.
There’s a lot to learn from the high dividend stocks Buffett has picked up over the years. Remember that the portfolio we’ve mentioned here is worth over $128 billion. At that scale, investing decisions are usually pretty different. But the portfolio can offer some clues on how the world’s greatest investor makes decisions.
Turns out a lot of his decisions are based on the dividend yield and quality. Buffett prefers steady businesses that are run by excellent managers and have a track-record of growing dividends over many decades. A quick look over the top 20 dividend stocks in this portfolio should tell you everything you need to know about hunting for the best stocks to add into a income-generating portfolio of your own.