It’s well-known that Warren Buffett is a fan of owning stocks that pay handsome dividend yields, even though Berkshire Hathaway (NYSE:BRK.A) itself does not pay shareholders similarly.
This year alone Berkshire should enjoy nearly $1 billion in dividends from owning 917 million shares of Apple (NASDAQ:AAPL) alone. Not only that but its $36.3 billion investment in Apple has ballooned to a total value of close to $180 billion.
And while Apple will undoubtedly pay Berkshire its highest dollar dividend amount, because Tim Cook’s firm represents a full 50% of its equity portfolio, other positions pay a higher yield. So what Buffett’s top dividend paying stocks?
Berkshire Hathaway Top Dividend Stocks
At the top of the dividend list is Citigroup (NYSE:C), which pays a 4.3% yield and represents 0.7% of Berkshire’s portfolio.
Sometimes a high yield goes hand-in-hand with so-so fundamentals and that seems to be the case for Citigroup. While revenues have been on the rise, poor earnings may demand a dividend cut down the line.
The company has also reported poor gross margins and the cash flow yield is nothing to write home about either.
According to analysts, Citigroup is fairly valued now with the consensus price target among 23 analysts sitting at $50.99 per share.
Next on the Buffett list of top dividend stocks is Kraft Heinz (NASDAQ:KHC), which pays a 4.2% yield.
Unlike Citigroup, Kraft Heinz has been reporting rising earnings per share on a consistent basis and is trading at a low price-to-earnings ratio relative to its EPS growth forecast.
With a P/E ratio of just 15.3x, Kraft appears to be trading at an attractive valuation and offering a handsome dividend yield even though it’s only 12% off its highs over the past year.
A position that Buffett has sold a good deal of but remains in his portfolio comes third on the top dividend list is Chevron (NYSE:CVX).
The energy company pays a 4.18% dividend yield and has a 44% payout ratio suggesting it’s highly sustainable. That’s no surprise given that Chevron has raised its dividend for an astonishing 36 consecutive years.
It also has some decent upside potential according to analysts, who on average have a $179.73 price target on it, though it must be said sentiment appears to be shifting negatively with five analysts revising their guidance lower for this period.
One thing Chevron has in its favor to sustain the yield is very impressive cash flows. Levered free cash flow last year alone was $37.26 billion.
In fourth position on the top dividend stocks in Berkshire Hathaway’s equity portfolio comes Ally Financial (NYSE:ALLY) which pays a 3.7% yield and also reports strong earnings that ensures the dividend is in no jeopardy.
Something that flies under the radar with Ally is its very high 18.2% shareholder yield, which is the sum of the dividend yield and percent of net share buybacks over the past twelve months.
The downside of Ally is net income is expected to decline this upcoming year and revenues fell by 8.4% last year.
Rounding out the top five spots is HP (NYSE:HPQ), which commands an 0.8% stake in Berkshire’s equity portfolio.
Like Ally, HP suffered from declining sales last year, down by 14.7% but the dividend yield of 3.66% is attractive and with a low 31% payout ratio, it too should have no problems continuing to reward shareholders with quarterly income.
Interestingly, HP also offers a very compelling shareholder yield of 13.5% and in that metric alone an insight into what Buffett looks for may appear. Not only does he pay attention to the yield a company pays but also to the net buybacks which combine to reward shareholders with a much higher overall yield as share count falls.
As a fan of low PE ratio stocks that generate billions in revenues, it’s no surprise HP made the cut because its earnings multiple sits at 9.8x while producing $53.7 billion in top line sales.
In the sixth spot of highest yielding Berkshire Hathaway stocks is Coca Cola (NYSE:KO), representing a 7.1% stake and paying a 3.07% yield.
While Coca Cola pays new investors just north of a 3% yield, Buffett bought it so long ago that It actually pays him, or more precisely Berkshire, an annual yield closer to 50% on the originally invested principal.
Obviously, Coke is one of Buffett’s long-time favorite companies and yet, for new buyers, it still offers a lot, such as a perfect Piotroski Score of 9, a 58.1% gross margin last year, and a 61 year history of hiking its dividend.
If all that isn’t enough, Coke also exemplifies its wide moat thanks to its 15.6% return on invested capital.
And for conservative investors, the low share price volatility means it can be held, for the most part, without any stomach-churning turbulence.
Last but not least, rounding out the top 7 dividend paying stocks Buffett has scooped up is Bank of America (NYSE:BAC), which represents a monster 9.0% of his overall portfolio.
Tailwinds supporting Brian Moynihan’s firm now include accelerating revenue growth and a 10-year history of hiking dividends. The current BAC dividend yield is 3.00% and, like most of the other stocks in this category, the risk to its sustainability is low given that the payout ratio is just 29%.
Similar to HP, Bank of America is also trading at a really attractive and low price-to-earnings multiple of just 9.1x, which no doubt is appealing to Buffett and his investment team.
Red marks against Bank of America include a rising debt burden in recent years and short-term, the share price appears to be technically overbought.
Buffett’s Top Dividend Stocks Wrap Up
In the list of dividend stocks, one thing that could easily go unnoticed, but is worth spotlighting, is how Buffett has shunned the really high yielding stocks.
It’s easy to find stocks paying 8%, 9% or even 10% yields but often something is structurally wrong with the firms when yields are that high.
In contrast, Buffett tends to favor the slow and steady stocks that pay a reasonable yield, frequently have a high shareholder yield too, and typically have attractive valuations. That combination has been a winning formula for him for decades, and it appears he’s sticking with what works all these years later.
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