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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| December 29, 2017
Warren Buffett isn’t known as a dividend investor, and regular quarterly payouts aren’t one of his preconditions for making an investment in a stock. But as chairman of Berkshire Hathaway (BRK.B), Buffett has selected handful of comparatively high-paying dividend stocks for the company’s portfolio.
From old-economy industrial and consumer stocks to high-yield real estate, Berkshire’s dividend holdings don’t follow a pattern. Indeed, of the 46 stocks in Berkshire’s portfolio, only five have dividend yields greater than 3%.
All of these dividend stocks still technically have “The Oracle of Omaha’s” blessing – reason enough for income investors to give them a closer look. But by Buffett’s own estimation, some of them have seen better days. Thus, it’s important to take note not of just Berkshire’s stakes, but the companies’ current situation and Buffett’s more recent thoughts toward his holdings.
Here’s a look at five Buffett-owned dividend stocks yielding 3% or more.
Data is as of Dec. 28, 2017. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Values for Berkshire’s holdings are courtesy of CNBC’s Berkshire Hathaway Portfolio Tracker. Stocks are listed in alphabetical order. Click on ticker-symbol links in each slide for current share prices and more.
Value of Berkshire’s stake: $18.3 billion
Dividend yield: 3.2%
Analysts’ recommendations: 5 strong buy, 0 buy, 10 hold, 0 sell, 0 strong sell
The first thing you need to know about Coca-Cola (KO, $45.72) is that it’s an income investor’s dream. The company has paid a quarterly dividend since 1920, and that payout has increased annually for the past 54 years.
The bear case on Coca-Cola is that the market for carbonated beverages in the U.S. has been shrinking for more than a decade and shows few signs of coming back. But Coke has responded by branching out into tea, bottled water, fruit juice and energy drinks.
Buffett, an unabashed fan of Cherry Coke, started investing in Coca-Cola soon after the stock market crash of 1987. In his 1988 letter to Berkshire shareholders, Buffett said he expected to hold on to the stock “for a long time.”
Three decades later, he has proven true to his word.
Value of Berkshire’s stake: $2.5 billion
Dividend yield: 3.6%
Analysts’ recommendations: 7 strong buy, 1 buy, 8 hold, 0 sell, 0 strong sell
Shares in General Motors (GM, $41.38) are cheap these days, but there are other reasons to like the stock.
GM used to focus on grabbing as much market share as it could, come what may to margins. Now it extols the virtues of “disciplined capital allocation.” In plain English, that means the automaker is reinvesting in the business, and expects its return on invested capital to be at least 20%. It’s also buying back stock and pledged to return all available free cash flow to shareholders. Those are Buffett-friendly moves.
But GM isn’t just working on its accounting. The company expects to be at the forefront of autonomous driving, and estimates a “commercial launch at scale” of driverless vehicles in major cities by 2019.
Crucially, shares are a bargain at current levels. GM stock trades at 7 times expected earnings, according to data from Thomson Reuters. That’s slightly cheaper than its historical average and well below Standard & Poor’s 500-stock index, which changes hands at almost 19 times projected earnings.
Value of Berkshire’s stake: $5.7 billion
Dividend yield: 3.9%
Analysts’ recommendations: 4 strong buy, 1 buy, 11 hold, 0 sell, 3 strong sell
Longtime Berkshire watchers were surprised when the company revealed the stake in International Business Machines (IBM, $154.04) in 2011 because Buffett had shown little interest in technology stocks to that point. But after reading IBM’s annual reports for more than 50 years without buying a single share, he was finally swayed by what he saw closer to home.
“We went around to all of our companies to see how their IT departments functioned ... and I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things,” Buffett said at the time.
But times change. Buffett started selling Berkshire’s position in IBM in 2017 after concluding that betting on its long-awaited reinvention was a mistake.
Value of Berkshire’s stake: $25.5 billion
Analysts’ recommendations: 8 strong buy, 1 buy, 4 hold, 0 sell, 0 strong sell
Buffett and private equity firm 3G Capital were the primary movers behind the 2015 deal that saw publicly traded Kraft Foods merge with privately held H.J. Heinz to create Kraft Heinz (KHC, $77.92). Berkshire Hathaway now owns 27% of the company. (The backstory is that 3G took Heinz private in 2013 with Buffett’s help.)
One of Buffett’s criteria for buying companies or making investments in them is that they have “outstanding” management. It’s reassuring that he has lavished praise on 3G, which actually runs Kraft Heinz’s business.
But 2017 hasn’t been kind to KHC shareholders. The stock is down 11% for the year-to-date, vs. a 19% gain for the S&P 500. The issue is changing tastes. “The company is seeing top-line weakness over the past several quarters owing to a shift in consumer preference toward natural and organic ingredients,” say analysts at Zacks Equity Research.
Whether Kraft can bounce back next year very much remains to be seen.
Value of Berkshire’s stake: $483.8 million
Dividend yield: 4.7%
Analysts’ recommendations: 5 strong buy, 1 buy, 5 hold, 0 sell, 0 strong sell
It was notable when Buffett revealed Berkshire’s position in Store Capital Corporation (STOR, $26.03) in the summer of 2017. Prior to Store, Buffett had never shown much affection for real estate investment trusts (REITs), which are a way to invest in real estate without owning the actual assets.
In Store’s case, it invests in single-tenant properties including chain restaurants, supermarkets, drugstores and other retail, service and distribution facilities. That’s to say, it’s a bet on brick-and-mortar retail, which is thought to be in permanent decline.
Store figures it can sidestep the threat of Amazon.com (AMZN) and e-commerce in general by focusing on “internet-resistant” retailers, such as furniture stores, hobby and craft centers, and hunting, fishing and camping shops. Apparently, Buffett thinks they can pull off the strategy.
In the meantime, Berkshire is rewarded with a high dividend yield near 5% as Buffett waits to find out.