Warren Buffett’s Highest Yielding Stocks

Warren Buffett’s Highest Yielding Stocks: Over the course of his career, Warren Buffett has had a famously complicated relationship with dividends. Despite its size, profitability and enormous cash flows, Berkshire Hathaway stock pays no dividends.

 

The reason Buffett has always maintained is because the money can be put to better use for the shareholders via internal reinvestment. Berkshire’s long-term growth history provides more than enough evidence to support this argument, rewarding investors much more richly than a cash dividend would have.

 

In the Berkshire portfolio, however, the dividend question becomes much murkier. Buffett owns many companies that pay dividends, including some that have long histories of raising their payouts year after year.

 

So, while Buffett may not choose for his own company to pay one, he is clearly not averse to receiving them from his investments. Here are four of Buffett’s highest yielding stocks:

 

Unsurprisingly, the highest-yielding stock in Warren Buffett’s portfolio is also his only REIT.

 

STORE Capital (NYSE:STOR) is a trust that focuses on single-tenant commercial properties, which it leases as profit centers to mid-sized companies.

 

One of STORE Capital’s biggest selling points is its use of triple-net leases, which require the tenant to pay for maintenance and all other expenses associated with the property.

STORE Capital yields 5.99 percent for an annual payout of $1.54 per share. While impressive in its own right, the stock’s dividend is even more appealing when its growth rate is taken into consideration.

 

Over the last five years, the payout has grown at a CAGR of 5.85 percent. The combination of a high dividend and high ongoing growth makes STORE Capital an attractive option for income in a portfolio.

 

For Buffett, STORE Capital is an unusual foray outside the world of pure value investing. While the company certainly generates excellent cash flow, its value metrics aren’t nearly as impressive as the typical Buffett stock.

 

With a forward P/E ratio of 11.45 and a price-to-book of 1.35, the company rates only slightly above its overall industry. STORE Capital does, however, provide a rich source of income for the Berkshire Hathaway portfolio.

 

The making of Kraft Heinz (NASDAQ:KHC) is among the most famous of Buffett’s business deals in recent years. In 2015, Berkshire Hathaway participated in the merger that created the joint packaged food company.

 

Buffett has since admitted that, in his view, he overpaid for Kraft. However, Kraft Heinz has proven to be a high-yield investment for Berkshire.

Today, Kraft Heinz yields 4.44 percent for a total yearly payout of $1.60. Unlike STORE Capital, however, KHC has not increased its dividend rapidly. The 5-year CAGR of dividend growth for the stock is actually negative at -7.79 percent. Even with this cut, however, Kraft Heinz stands out as one of the highest yields in Buffett’s investment portfolio.

 

True to his statements, Kraft Heinz appears to be one of Warren Buffett’s very few mistakes from a return perspective. Over the last five years, the stock has lost nearly 60 percent of its value. During that time, Berkshire Hathaway has remained committed to neither increasing nor decreasing its stake in the company.

 

Telecom giant Verizon (NYSE:VZ) has been a historically strong dividend producer. At the time of this writing, the stock yielded 5.21 percent for a total payout of $2.56 annually. Verizon is also expected to perform well going forward, as 5G transition could be a major driver of revenue for the company.

 

Berkshire Hathaway initially bought a major stake in Verizon in 2014, when it purchased nearly 15 million shares across two rounds of buying.

 

In late 2020, Buffett went even further in on Verizon, buying an additional 147 million shares. Earlier this year, though, Buffett all but exited the Verizon position, selling off 99.1 percent of Berkshire’s total stake. Today, Buffett’s investment company holds just 1.38 million shares of Verizon.

The Berkshire sale may have been a reflection of underlying business weakness at Verizon. Around the time Buffett was liquidating his company’s stake, Verizon was losing hundreds of thousands of subscribers to its competitors.

 

5G could be the factor that saves Verizon, as it will be able to leverage the new technology to increase average revenue per customer. This possibility, however, is far from certain. If user counts continue to fall, Verizon could face tough times ahead.

 

Although Berkshire sold most of its Verizon stake, the company still looks at least decent from a value perspective. Forward price-to-earnings stands at just 9.09, compared to an industry average of 27.9.

 

The company’s debts, however, are relatively high at a ratio of 1.64 to equity. This fact, paired with the loss of subscribers, may have contributed to the decision on Buffett’s part to divest Berkshire of its Verizon stake.

 

Financial heavyweight Citigroup (NYSE:C) is among Buffett’s newest acquisitions. Berkshire announced a $2.95 billion stake in the company in May. The Citigroup stake is one of several buys Buffett has made recently as Berkshire takes advantage of lower stock prices to identify new opportunities.

 

True to his value investing roots, Buffett bought up Citigroup aggressively while the stock sold off below its natural value.

 

At the time of Berkshire’s acquisition, Citigroup stock was down almost 40 percent over the previous 12 months. The bank also served as an important financial sector replacement for Wells Fargo, which Berkshire had previously divested.

In addition to likely getting an undervalued stock and a replacement for a long-time favorite for banking exposure, Buffett also secured a solid stream of income for Berkshire when he purchased Citigroup. The stock yields 4.29 percent, paying out $2.04 annually.

 

The company has also increased its dividend at a blistering CAGR of 26.09 percent over the past five years. Investors should, however, be aware that this number is skewed and does not reflect the current, much lower rate of dividend growth. The 3-year CAGR, which is more realistic, is 4.26 percent.

 

Citigroup’s dividend was almost certainly secondary to its value in Buffett’s decision to buy. With a forward P/E of just 6.69, price-to-sales of 1.16 and price-to-book of 0.51, Citigroup would look attractive to practically any value investor.

 

Buffett’s average buy price of $61.77 is just above the 12-month median analyst target price of $60, meaning that Berkshire likely won’t see its stake explode in 2022. Over the long haul, though, Citigroup could be a major source of gains for the massive investment conglomerate.

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