Opting for these two stocks can offer a perfect blend of potential dividend growth and a substantial yield. Warren Buffett, the CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), has a penchant for companies that provide shareholders with regular cash returns, despite his company not doing the same. Big names like Apple, Bank of America, Occidental Petroleum, American Express, and Coca-Cola are the primary contributors to Berkshire’s dividend income, but they’re not the only profitable income-yielding stocks held by the conglomerate.
For investors seeking exceptional deals, here are two dividend-providing stocks from Berkshire’s holdings, currently trading at a discount of more than 40% and worth considering.
A Dual Benefit for GM Presently trading at 49% less than its peak value, General Motors (NYSE: GM) could be an outstanding dividend stock to acquire. The company is reaping the advantages of two strong trends. Firstly, the prevalent supply shortage enables GM to demand high prices for the legacy cars they sell. The earnings from this trend help GM to pour billions into the second one – the soaring demand for electric vehicles (EVs).
Consequently, GM posted an operating profit of $10.3 billion in 2022, marking the first time it exceeded the $10 billion mark in the past ten years. While the supply chains have shown signs of recovery since the economic reopening, the full recovery is yet to be seen. GM will continue to benefit as long as these industry trends persist.
Currently, GM’s dividend yield is a humble 0.8%, but if the annual profits above $10 billion continue, we might see an increase. GM’s latest dividend payout ratio was 5%, indicating that it reinvests 95% of its earnings. And given the forward price-to-earnings ratio of only 5, this established automaker is available at a relatively affordable valuation. Therefore, it’s unsurprising to see Buffett having GM in his portfolio.
Verizon:
An Attractive Yield and Valuation Verizon Communications (NYSE: VZ), a prolific cash producer, trade at low earnings multiples and boasts a superb dividend profile. The shares are trading 44% less than their peak, yielding roughly 7.5%, with a substantial probability of a continued dividend rise. Verizon recently declared its 16th consecutive annual payout increase and is well-positioned for another one this fall.
In the last year, Verizon’s free cash flow (FCF) reduced by approximately 27% to $14.1 billion due to hefty infrastructure investments, inflationary pressure, and business wireline unit weakness. Despite this, the FCF was significantly more than the $10.8 billion dividend payouts to shareholders, and it’s likely to see less pressure this year.
Verizon has invested heavily in C-Band spectrum rights to expand its 5G network. However, the company predicts a decline in these expenses in 2023, easing FCF pressure. The business also anticipates annual cost savings of $2 billion to $3 billion by 2025.
Verizon reported a free cash flow of $2.3 billion in this year’s first quarter, up from $1 billion in the same quarter last year. This substantial leap happened even though discontinuing the company’s 3G services led to a 1.9% year-over-year decrease in overall revenue, amounting to $32.9 billion.
Verizon’s stock, trading at just 7.5 times this year’s expected earnings, seems underpriced. This telecom titan emerges as a solid long-term investment prospect for investors pursuing sturdy defensive stocks with a significant dividend yield.
Striking a Balance between Dividend Growth and Yield Investing in a mix of dividend-growth stocks and stocks already offering hefty yields can be a strategic move as it provides opportunities for capital growth and income generation. With GM and Verizon delivering impressive profits and trading cheaply based on price-to-earnings, these stocks could have considerable stock gains and dividend income, making them wise picks for long-term investors at the current valuations.
Investing in these two stocks, GM and Verizon, endorsed by the esteemed Warren Buffett, could offer substantial long-term returns. These stocks trading at a discount and consistently providing dividend yields are solid examples of profitable stocks for value-driven investors. Additionally, they present strong dividend growth potential, backed by impressive profits and low price-to-earnings ratios. Hence, both stocks seem well poised to yield significant capital gains and dividend income, making them attractive buys in today’s market scenario.
