The top dividend stocks in Warren Buffett’s portfolio are anticipated to generate notable returns for the Berkshire Hathaway equity portfolio.
Despite Berkshire Hathaway (NYSE: BRK.B) not distributing a dividend, more than half of its nearly $300-billion equity portfolio stocks do. The cream of the crop among Warren Buffett’s dividend stocks yields significant income for the Sage of Omaha.
In 2022, Berkshire Hathaway garnered $6.04 billion in dividend income, a surge from $5.06 billion in 2021 and $4.89 billion in 2020.
In the long run, dividend stocks can yield exceptional total returns (capital appreciation plus dividends). “This is because consistent dividend increases enhance the yield on an investor’s original cost basis. If you’re patient enough, the humble yield you garnered on your initial investment can even reach double digits one day,” says Dan Burrows, senior investment writer at Kiplinger.com, in his article spotlighting the finest dividend stocks of Wall Street.
This has indeed been the case with Berkshire Hathaway. Over the previous three years, BRK.B has averaged an annual total return of 21.8%, surpassing the S&P 500 Index’s 15.6% total return.
Buffett’s Views on dividend stocks
Buffett shared his thoughts about dividends in his 2020 shareholder letter:
“BNSF has delivered significant dividends to Berkshire – totalling $41.8 billion. The railroad pays us what remains after catering to its business needs and retaining a cash balance of approximately $2 billion,” penned Buffett. “This prudent policy enables BNSF to borrow at favourable rates, without relying on Berkshire’s guarantee of its debt.”
Berkshire’s internally owned business generated over $6 billion in dividend income in 2022, with a whopping 71% derived from just five stocks.
Criteria for Selecting the Top Buffett dividend stocks
Having written about investments since 2008, my selection criteria included stocks that yield equal to or more than the S&P 500’s current 1.6% yield. Consequently, Apple (NASDAQ: AAPL), which currently generates a mere 0.5%, still needs to cut, despite being one of the top stocks in Berkshire Hathaway’s equity portfolio for dividend purposes.
All the stocks featured offer enticing dividend yields, have robust fundamentals, and have yielded significant income for Berkshire Hathaway. On that note, here are seven of the top dividend stocks in Warren Buffett’s portfolio.
Louisiana-Pacific
Market Capitalization: $4.4 billion
Dividend Yield: 1.6%
Berkshire Hathaway Portfolio Share: 0.1%
Berkshire Hathaway Ownership Percentage: 9.8%
Warren Buffett initiated a stake in Louisiana-Pacific (NYSE: LPX) in the third quarter of 2022 and augmented it by 21% to 7.0 million LPX shares in the next quarter. Buffett’s move was likely driven by the prospect of benefiting from an anticipated resurgence in new home construction in 2023 and 2024.
In April, Louisiana-Pacific announced its plans to acquire a mill in Wawa, Ontario, and convert it into a SmartSide trim and siding operation. The company’s largest single-line siding mill is expected to increase LPX’s total annual siding capacity to 2.7 billion square feet. The deal is scheduled to close in May. In fiscal 2022, the Siding Solutions segment generated $1.5 billion in revenue, marking a 25% increase from the previous year. This segment contributed 38% of LPX’s total revenue of $3.9 billion in 2022. However, Truist Securities analyst Michael Roxland maintains a Hold rating on LPX stock due to diminishing housing and wood products demand. LPX has shown a compound annual growth rate of over 13% in its dividend for five consecutive years.
Coca-Cola
Market Capitalization: $277.1 billion
Dividend Yield: 2.9%
Berkshire Hathaway Portfolio Share: 7.4%
Berkshire Hathaway Ownership Percentage: 9.2%
Coca-Cola (NYSE: KO) is one of the longest-held and highest-yielding dividend stocks in Berkshire’s portfolio. Buffett started acquiring Coca-Cola shares in 1988, and by the end of 1989, he held 23.4 million shares. Coca-Cola’s fourth-largest holding in the Berkshire portfolio is currently valued at $25.5 billion, showing a compound annual growth rate of 9%. Berkshire receives a yearly dividend of $736 million from its 400 million shares in Coca-Cola.
Coca-Cola recently appointed Philippe Schaillee as CEO of its subsidiary Costa Coffee and is further expanding its presence in the alcoholic beverages market. Together with Molson Coors Beverage, Coca-Cola plans to launch three new flavours of Peace Hard Tea, an alcoholic beverage with a 5% alcohol content.
Bank of America
Market Capitalization: $217.4 billion
Dividend Yield: 3.2%
Berkshire Hathaway Portfolio Share: 8.8%
Berkshire Hathaway Ownership Percentage: 12.9%
Bank of America (NYSE: BAC), following Apple, is the second-largest holding in Berkshire Hathaway’s portfolio. Buffett initiated his stake in BAC in the third quarter of 2017, and Berkshire is now the bank’s largest institutional shareholder. Buffett sold several bank stocks, citing they were less sturdy investments than before. However, he retains his investment in Bank of America, showing confidence in the bank and its CEO, Brian Moynihan.
Bank of America recently experienced unrealized losses of $99 billion from their bond portfolios. However, CFO Alastair Borthwick expects net interest income to increase as rates rise, leading to a decrease in unrealized losses. This is due to the increased value of deposits in a rising-rate environment. S&P Global Market Intelligence lists a consensus Buy rating for BAC among analysts, with an average price target of $36.13, suggesting a potential 23% increase.
HP
Market Capitalization: $29.2 billion
Dividend Yield: 3.5%
Berkshire Hathaway Portfolio Proportion: 0.9%
Berkshire Hathaway Ownership: 10.6%
Berkshire Hathaway started its journey with HP (NYSE: HPQ) by purchasing shares in the first quarter of 2022. Revealing an ownership stake of 121 million shares in April 2022, Berkshire saw a 15% surge in the share price, delivering a quick unrealized gain on their investment. However, considering the estimated average price paid for HPQ shares, Berkshire currently sits at a loss. As the largest shareholder in HP, Berkshire owns approximately 11 million more shares than the Vanguard Group.
HPQ’s trading at just 8.8 times forward earnings, coupled with its consistent reward to shareholders, places it at an attractive valuation. A 5% increase in its quarterly dividend was seen in November, following a 29% boost in October 2021. The dividend yield stands at a healthy 3.5%, twice the dividend yield for the S&P 500. In fiscal 2022, HPQ distributed $1.04 billion in dividends and repurchased $4.3 billion of its stock. With a cash balance of $3.1 billion, HPQ can continue to pay out robust compensation, securing its spot in the top Buffett dividend stocks list. Based on Berkshire’s 104 million HPQ shares, it can anticipate nearly $110 million in dividends from HP in the coming year. While Buffett patiently waits for the stock to recover, Argus Research analyst Jim Kelleher holds a Buy rating and a $48 price target, 63% above its current trade price. Despite potential risks arising from a recession and subsequent dip in PC and printer sales, Kelleher believes HPQ is poised to weather this storm, thanks to its financial strength, market leadership, and growth characteristics.
Chevron
Market Capitalization: $302.0 billion
Dividend Yield: 3.8%
Berkshire Hathaway Portfolio Proportion: 8.4%
Berkshire Hathaway Ownership: 8.8%
Chevron (NYSE: CVX) was one of many energy stocks that witnessed a superb performance in 2022. In November, it reached an all-time high of $189.68, closing the year with a 53% increase, not considering dividends. This performance far exceeded the S&P 500’s, which ended 2022 down 23.9%. Though the stock has declined by nearly 7% in 2023, it allows investors to buy this leading blue-chip stock at a discounted price.
In January, Chevron announced a 6% increase in its quarterly dividend to $1.51 per share. With a track record of growing its payout for 36 consecutive years, CVX boasts a 3.6% yield, over double the S&P 500’s yield, solidifying its position as one of Buffett’s preferred dividend stocks. Furthermore, the company introduced a new $75 billion stock buyback program on April 1. Trading at just 11.5 times forward earnings, well below its five-year average of 37.8, CVX remains one of the most appealing value stocks.
Kraft Heinz
Market Capitalization: $48.8 billion
Dividend Yield: 4.0%
Berkshire Hathaway Portfolio Proportion: 3.7%
Berkshire Hathaway Ownership: 26.5%
Despite lagging behind the broader index by around 460 basis points (0.01%) in 2023, consumer staples stocks, including Kraft Heinz (NASDAQ: KHC), are the fourth best-performing sector year-to-date. Over the past year, KHC, known for Kraft mac & cheese and Heinz ketchup, has remained flat year-to-date and declined about 1%.
Berkshire Hathaway shareholders can be assured that KHC will remain one of the top Buffett dividend stocks as it continues to distribute a 40-cent per share quarterly dividend, amounting to an annual payment of $1.60 per share with an attractive 4.0% yield. In 2022, Kraft Heinz distributed $1.96 billion in dividends. Berkshire can expect to receive $521 million in bonuses in 2023. Kraft Heinz has used excess cash and divestiture proceeds to reduce leverage instead of repurchasing its shares.
Argus Research analyst Chris Graja holds a Hold rating and a $37 price target on KHC stock, marginally below its current trading value. “Increasing volume is crucial for the company’s success and necessary for any potential upgrade of the stock,” Graja states. However, most covering analysts are optimistic about KHC, demonstrated by a consensus Buy recommendation at S&P Global Market Intelligence. Furthermore, the target price of $45.84 suggests a potential 12% upside in the coming 12 months.
Paramount Global
Market Capitalization: $10.8 billion
Dividend Yield: 4.2%
Berkshire Hathaway Portfolio Proportion: 0.5%
Berkshire Hathaway Ownership: 15.3%
Paramount Global (NASDAQ: PARA) had an impressive end to 2022, attracting almost 10 million subscribers to its Paramount+ streaming platform. Much of this surge was driven by the anticipation for Top Gun: Maverick, the long-awaited sequel to the 1986 blockbuster.
The movie generated $1.48 billion globally, surpassing Avatar: The Way of Water ($1.39 billion) as the highest-grossing film of 2022. This success helped Paramount+ reach 56 million subscribers and over 77 million across its platforms, including Pluto TV and Showtime OTT.
However, the increased cost of streaming prompted Paramount Global to cut its quarterly dividend from 24 cents to 5 cents per share, leading to approximately $500 million in annualized cash savings. Despite these changes, BofA Securities analysts recently upgraded the communication services stock from Neutral (Hold) to Buy, raising their price target to $32, about double its current share price.
Even though Paramount Global is a small part of the Berkshire portfolio, it is one of 13 companies where Berkshire has an ownership stake of over 10%. Though it had been paying substantial dividends to stakeholders like Berkshire Hathaway, the recent payout reduction might jeopardize its position in the top Warren Buffett dividend stocks list.
The dividend stocks in Warren Buffett’s portfolio offer a compelling investment opportunity, showcasing the potential for substantial returns and consistent income. These carefully selected stocks provide attractive dividend yields and demonstrate solid fundamentals and a track record of generating impressive income for Berkshire Hathaway. Whether it’s Louisiana-Pacific, Coca-Cola, Bank of America, or other notable stocks, investors can take cues from Buffett’s strategy and consider these dividend stocks for their portfolios.
