Warren Buffett’s Top 20 Dividend Stocks With The Highest Yields by Ben Reynolds, Sure Dividend
Warren Buffett’s net worth is now over $60 billion.
He is (arguably) the greatest investor of all time.
Buffett has grown his wealth by investing in and acquiring business with strong competitive advantages trading at fair or better prices.
[drizzle]Here’s the surprising part…
Most investors know Warren Buffett looks for quality, but few know the degree to which he invests in dividend stocks.
- 92.5% of Warren Buffett’s portfolio is invested in dividend stocks
- His top 9 holdings have an average dividend yield of 3.0%
- Many of these dividend stocks have paid rising dividends over decades
Warren Buffett prefers to invest in shareholder friendly businesses with long track records of success.
It happens that dividend stocks with long histories of dividend increases match what Warren Buffett looks for in a stock investment.
Warren Buffett's Portfolio
Warren Buffett's portfolio currently consists of 46 stocks.
Of these, 32 are dividend stocks.
Warren Buffett’s portfolio as a whole generates a dividend yield of 2.9%…
About 22% higher than the S&P 500’s dividend yield of 2.3%.
Warren Buffett's top 5 holdings make up over 65% of his portfolio. These 5 stocks represent Warren Buffett's highest conviction picks based on the amount of money he has invested in them.
All of his top 5 holdings are dividend stocks.
His top 5 holdings have a portfolio weighted dividend yield of 3.2%. Warren Buffett's 5 top holdings are:
- Kraft-Heinz (KHC) which makes up 19.2% of his portfolio
- Wells Fargo (WFC) which makes up 18.1% of his portfolio
- Coca-Cola (KO) which makes up 14.1% of his portfolio
- IBM (IBM) which makes up 8.5% of his portfolio
- American Express (AXP) which makes up 6.6% of his portfolio
Warren Buffett's Top 20 Highest Yielding Dividend Stocks
Each of Warren Buffett's top 20 highest yielding dividend stocks are analyzed below. Relevant metrics are shown, including:
- Price-to-earnings ratio
- Dividend history
- Current dividend yield
- Historical growth rate
These metrics are shown to give an idea of the relative investment merit of each business. Reviewing Warren Buffett's highest yielding dividend stocks may give you new ideas on how to improve your portfolio.
20 – The Bank of New York Melon Corporation (BK)
Dividend Yield: 2.1%
Price-to-Earnings Ratio: 12.0
Years of Steady or Rising Dividends: 7
Percent of Warren Buffett's Portfolio: 0.6%
10 Year Book-Value-Per-Share Growth Rate: 9.8%
The Bank of New York Melon Corporation (hereafter referred to as BK) is a global financial services corporation with a $36 billion market cap. The company operates in 3 segments:
- Investment Management
- Investment Services
- Other
The Investment Management segment provides investment management services to institutional and retail investors. It also provides investment management, wealth and estate planning and private banking solutions. The segment generates ~20% of the company’s income.
The Investment Services segment provides global custody and related services, broker-dealer services, global collateral services, corporate trust, depositary receipt and clearing services as well as global payment/working capital solutions to global financial institutions. The segment generates ~75% of the company’s income.
The Other segment primarily includes credit-related activities, leasing operations, corporate treasury activities, global markets and institutional banking services, business exits, M&I expenses and other corporate revenue and expense items. The segment generates ~5% of income for the company.
The Investment Services segment is BK’s largest by far. BK generates the vast majority of its revenue through fees rather than interest income. As a result, the company does not stand to gain from rising interest rates.
BK sees its income fall sharply during market corrections and recessions. The company posted significant losses in 2009 during the Great Recession.
BK cut its dividend during the Great Recession. The company’s dividend payments still have not reached levels reached in 2007.
While the company does struggle during recessions, it can also trade for a premium price-to-earnings ratio during bull markets. This makes BK a stock to purchase during market declines and sell during strong bull markets.
With a price-to-earnings ratio of just 12, now is an opportune time to enter into this investment services business.
19 – American Express (AXP)
Dividend Yield: 2.3%
Price-to-Earnings Ratio: 10.2
Years of Steady or Rising Dividends: 38
Percent of Warren Buffett's Portfolio: 6.6%
10 Year Earnings-Per-Share Growth Rate: 7.0%
American Express is one of Warren Buffett's core holdings. He first purchased the stock in 1964… Over 50 years ago. Now that’s a long-term investment.
American Express is a well known credit provider. The company currently has a market cap of $50 billion. Only Visa (V) and MasterCard (MA) have larger market caps in the credit services industry.
Despite being a well-established business, American Express continues to exhibit solid growth. The company has compounded its earnings-per-share at 7% a year over the last decade.
Share repurchases have helped American Express realize its growth rate over the last decade. The company has repurchased nearly 4% of shares outstanding a year over the last decade.
American Express focuses its credit lending services on those with good credit. As a result, it experiences lower bad credit losses than industry averages.
The company’s stock is down around 40% this year. Costco (COST) [which is another Warren Buffett holding] is cancelling its exclusive card membership agreement with American Express. Additionally, the comapny is being hurt by the stong United States dollar. In the short run, this will impact earnings. In the long run, American Express’ competitive advantage remains intact.
The company appears undervalued at this time. A price-to-earnings ratio of 10.2 is far too low for a high quality credit business.
18 – U.S. Bancorp (USB)
Dividend Yield: 2.7%
Price-to-Earnings Ratio: 11.8
Years of Steady or Rising Dividends: 7
Percent of Warren Buffett's Portfolio: 2.8%
10 Year Book-Value-Per-Share Growth Rate: 8.3%
It is easy to see why Warren Buffett has invested billions of Berkshire Hathaway’s portfolio into U.S. Bancorp stock.
U.S. Bancorp is the banking industry leader in return on assets, return on equity, and efficiency ratio.
Note: Ffficiency ratio is calculated as expenses before interest expense divided by total revenue.
The image below shows U.S. Bancorp’s industry leading status in these important metrics for fiscal 2015.
U.S. Bancorp is more than highly profitable. It is also very shareholder friendly. The company targets a dividend payout ratio of 30% to 40% a year and also targets spending 30% to 40% of earnings on share repurchases each and every year.
At current price levels, this comes to a shareholder yield of around 5.5%. The company has also managed to grow assets at about 7.5% a year over the last decade. With a shareholder yield of ~5% and a 7.5% growth rate, investors can expect total returns of around 13% a year from U.S. Bancorp.
U.S. Bancorp currently trades at a price-to-earnings ratio of just 11.8. Banks have traditionally traded at price-to-earnings ratios below those of the overall market due to risk of bank failure and strong competition.
U.S. Bancorp has found a way to be more profitable than its peers. In addition, the company remained profitable throughout the Great Recession of 2007 to 2009 – though it did cut its dividend significantly during that period. At its current price-to-earnings ratio, U.S. Bancorp appears to be somewhat undervalued.
17 – M&T Bank Corporation (MTB)
Dividend Yield: 2.8%
Price-to-Earnings Ratio: 13.7
Years of Steady or Rising Dividends: 25
Percent of Warren Buffett's Portfolio: 0.5%
10 Year Book-Value-Per-Share Growth Rate: 5.7%
M&T Bank Corporation is a bank holding company with ~800 locatons across the East COast.
M&T Bank is one of the few banks that did not cut its dividend payments during the Great Recession of 2007 to 2009. M&T Bank Corporation has grown to become one of the 15 largest banks in the United States.
M&T Bank Corporation maintains higher than industry average returns-on-equity and returns-on assets.
Additionally, the company is highly regarded for its conservative nature. M&T Bank Corporation does not over extend itself by writing risky loans.
The company’s conservative nature has produced phenomenal results for long-term shareholders.
The company has produced 18.9% annualized total returns for shareholders since 1980, one of the highest of any stocks from that time.
Rising interest rates are a catalyst for M&T Bank Corporation. Rising rates favor the company as they lead to a greater spread on interest earned from deposits versus interest paid.
Shares of M&T Bank Corporation currently trade for a price-to-earnings ratio of 13.7. The comapny appears underavlued at current prices.
The company’s future looks bright and it trades at a reasonable valuation multiple. Additionally, M&T Bank Corporation has a dividend yield of 2.8%, somewhat above the S&P 500’s dividend yield.
The company’s combination of stable growth, fair valuation, and solid dividend yield should appeal to dividend growth investors looking for exposure in the banking sector.
16 – Phillips 66 (PSX)
Dividend Yield: 3.1%
Price-to-Earnings Ratio: 10.9
Years of Steady or Rising Dividends: 37 (including history with ConocoPhillips)
Percent of Warren Buffett's Portfolio: 4.6%
10 Year Earnings-Per-Share Growth Rate: N/A
Phillips 66 was created in 2012 when ConocoPhillips spun off the following pieces of its business:
- Downstream operations
- Chemical operations
- Retail fuel (gas stations) operations
- Midstream natural gas operations
Phillips 66 refining and chemical divisions fare better than upstream oil operations during periods of low oil prices. The company’s earnings did not ‘fall off a cliff’ in 2015 – unlike many upstream oil corporations. The company is currently trading at a price-to-earnings ratio of just 10.9. Phillips 66 stock appears to be a bargain at this time.
Phillips 66 pays an above average yield of 3.1%. In addition to its above-average dividend yield, Phillips 66 has also been gobbling up its own shares through share repurchases. The company has reduced its net share count by 15% since 2012. Phillips 66’s share repurchases combined with its dividend yield give it a shareholder yield of 8.5%.
The company plans to grow through continued expansion in the United States. Phillips 66 will focus it growth capital expenditures on increasing its midstream and chemical capabilities.
Overall, investors in Phillips 66 can expect single digit growth in operations boosted by the company’s aggressive share repurchases and dividend yield for total returns above 10% a year.
Warren Buffett recently added to his position in Phillips 66, showing that he believes in the company’s future despite low oil prices.
The company’s low price-to-earnings ratio, high shareholder yield, and reasonable growth prospects bode well for shareholders in Phillips 66. The stock is also ranks well using The 8 Rules of Dividend Investing.
15 – Wal-Mart (WMT)
Dividend Yield: 3.0%
Price-to-Earnings Ratio: 14.0
Years of Steady or Rising Dividends: 42
Percent of Warren Buffett's Portfolio: 3.1%
10 Year Earnings-Per-Share Growth Rate: 7.4%
Wal-Mart is the largest retailer in the world with over 1 billion square feet of retail space. The company has over 4,500 stores in the U.S. as well as over 6,700 outside of the U.S.
Wal-Mart’s competitive advantage comes from its massive scale and resulting operating efficiency. The company uses its scale to pressures suppliers to lower their prices. The company passes savings on to consumers. This results in a virtuous feedback loop of improvement. The simplicity of Wal-Mart’s business model is one of its strengths.
The company is very shareholder friendly. Wal-Mart has increased its dividend payments for 42 consecutive years. This makes Wal-Mart a Dividend Aristocrat. Additionally, the company regularly repurchases its shares.
Wal-Mart’s current growth initiatives focus on growing digital sales and building new smaller-store locations to ‘fill-in-the-gaps’ between its larger supercenter stores. Digital sales are growing at 20%+ a year – on a base of $12 billion. Wal-Mart is already one of the largest e-commerce companies in the world, and it still has much room for improvement and growth. The company’s smaller-layout stores are seeing impressive results as well, with neighborhood market stores growing comparable store sales in the mid single digits on a regular basis.
With a price to earnings-ratio under 15, Wal-Mart is a timely purchase. Warren Buffett has invested $3.7 billion of Berkshire Hathaway’s funds into Wal-Mart stock. The company’s future growth plans combined with its shareholder friendly management and fairly low price-to-earnings ratio make a strong combination for dividend growth investors.
14 – Johnson & Johnson (JNJ)
Dividend Yield: 3.0%
Price-to-Earnings Ratio: 18.6
Years of Steady or Rising Dividends: 53
Percent of Warren Buffett's Portfolio: 0.0% (very small amount of ownership)
10 Year Earnings-Per-Share Growth Rate: 5.5%
The image below shows the 10 year cumulative returns of Johnson & Johnson (JNJ) and the S&P 500 (SPY):
Source: Data from Yahoo! Finance
$1.00 invested in Johnson & Johnson on 1/27/2006 is worth $2.33 versus $1.82 for the same investment in SPY (both include reinvested dividends).
What’s even more impressive about the company’s performance over the last decade is its standard deviation.
The company is an exceptionally low risk investment. Compare Johnson & Johnson’s stock price standard deviation to that of the S&P 500’s over the last 10 years:
- S&P 500 standard deviation of 20.7%
- Johnson & Johnson standard deviation of 16
Johnson & Johnson is not new to success. The company has paid increasing dividends for 53 consecutive years.
Johnson & Johnson’s long dividend history makes it 1 of 17 Dividend Kings. Dividend Kings are stocks with 50+ consecutive years of dividend increases. That is twice the minimum amount needed to be a Dividend Aristocrat.
A company cannot grow its dividends for 5 decades without a strong and durable competitive advantage.
Johnson & Johnson’s has 3 broad competitive advantages that differentiate it from its competitors:
- Size/scale competitive advantage
- Research & development competitive advantage
- Brand competitive advantage
Johnson & Johnson’s size/scale competitive advantage is a result of it being the largest player in the health care industry. The company’s long history gives it excellent connections with suppliers and governments around the world. The company can keep input costs low by buying in far larger quantities than competitors can.
The company’s large size gives it a bigger research and development budget that its peers. Johnson & Johnson’s research and development spending by year is shown below:
- $9 billion in 2015
- $8.5 billion in 2014
- $8 billion in 2013
This spending has produced tangible results. Johnson & Johnson generates about 25% of revenue from products it has developed in the last 5 years. The company’s pharmaceutical portfolio in particular is benefiting from large research and development spending.
Johnson & Johnson commands premium pricing through its well-known brands. The company supports its consumer brands and pharmaceuticals with large advertising spending. The company spends around $2.5 billion every year on advertising.
Johnson & Johnson is currently trading for a price-to-earnings ratio of 18.6. The company is cheaper than the S&P 500 despite being of a much higher quality than the average business.
Johnson & Johnson will not deliver rapid growth for shareholders. Earnings-per-share have grown at just 5.5% a year over the last decade. With that said, the company does have a solid dividend yield of 3% and scores very high marks for safety.
13 – United Parcel Service (UPS)
Dividend Yield: 3.1%
Price-to-Earnings Ratio: 21.8
Years of Steady or Rising Dividends: 33
Percent of Warren Buffett's Portfolio: 0.0% (very small amount of ownership)
10 Year Earnings-Per-Share Growth Rate: 3.6%
United Parcel Service is the largest publicly traded freight and delivery company in the world based on its $85 billion market cap. The company was founded in Seattle in 1907. Today UPS is a global business with ~2,000 operating facilities and !100,000 vehicles in its fleet.
The larger a delivery network gets, the stronger its competitive advantage becomes as it can ship anywhere in the world. Having such a large operation results in lower prices. UPS is the largest freight company. The company has a strong competitive advantage that will only get stronger as it continues to grow.
The mail industry in the U.S. is an oligopoly largely dominated by just 3 players:
- Fed Ex (FDX)
- United Parcel Service
- United States Post Office
Of the three, only the two publicly traded companies are profitable.
Online retail will continue to drive growth for United Parcel Service going forward. The company will benefit from increased package shipments due to online purchases. Online retail is expected to grow about 4x as fast as global GDP over the next several years. The image below from UPS’ investor presentation shows this growth:
The company has more tailwinds besides e-commerce growth. United Parcel Service is also benefiting from growth in emerging markets.
The company has focused on expanding its international reach over the last 20 years. UPS stands to gain from increased shipments between countries as global commerce grows. In total, the company is expecting 6% to 12% earnings-per-share growth going forward
United Parcel Service is a shareholder friendly business. The company has several decades of rising dividends. In addition, the company has reduced its share count by an average of 2% a year over the last decade.
United Parcel Service is a low-risk business in a fairly slow-changing industry. The company appears to be somewhat overvalued at current prices. The company’s historical price-to-earnings ratio is around 19. Shares traded for a price-to-earnings ratio under 18 for a good portion of the period from 2010 through 2013.
12 – Deere & Company (DE)
Dividend Yield: 3.1%
Price-to-Earnings Ratio: 13.6
Years of Steady or Rising Dividends: 27
Percent of Warren Buffett's Portfolio: 1.1%
10 Year Earnings-Per-Share Growth Rate: 6.5%
Deere & Company is the largest manufacturer of farming machinery in the world. Deere & Company also manufactures forestry and construction equipment. In addition, the company operates a financing division to help customers finance expensive equipment.
Deere & Company is one of Warren Buffett's most recent purchases. The company is a timely buy as it is nearing its cyclical trough. The compny’s earnings (and share price) are temporarily diminished. Long-term investors have a chance to pick up shares of this high quality business for a discount.
Deere & Company appears to be significantly uderavlued with its price-to-earnings ratio of just 13.6. Peak earnings during the company’s last cyclical peak were $9.08 per share. During the next peak, the company should see earnings-per-share of at least $10 per share. The company has traditionally had a price-to-earnings ratio of around 10 during peak earnings years. This implies a share price of at least $100 when the company reaches its cyclical peak. The stock is currently trading for around $78 per share.
Deere & Company’s competitive advantage comes from its brand recognition and reputation for quality in the farming machinery industry. The company’s competitive advantage has given it 60% market share in the farming equipment industry in the US and Canada.
Long term growth prospects are bright for Deere & Company. Population growth and GDP gains in emerging markets will drive demand for food, grains, and farming equipment. Deere & Company has compounded earnings-per-share at 13.2% a year over the last 16 years.
The company should continue to grow earnings-per-share at a double-digit rate over full market cycles. This will result in more-than-satisfactory returns for shareholders.
In addition to solid growth, Deere & Company currently has a dividend yield of3.1% which provides current income for dividend stock investors.
11 – Coca-Cola (KO)
Dividend Yield: 3.0%
Price-to-Earnings Ratio: 20.3
Years of Steady or Rising Dividends: 53
Percent of Warren Buffett’s Portfolio: 14.1%
10 Year Earnings-Per-Share Growth Rate: 5.9%
Coca-Cola is Warren Buffett’s third largest holding (behind Wells Fargo and Kraft-Heinz). Berkshire Hathaway has nearly $17 billion invested in Coca-Cola.
Coca-Cola is the global leader in ready-to-drink beverages. The company has 20 brands that generate $1 billion or more per year in sales, and the Coca-Cola soda brand is the most popular in the world by a wide margin.
Coca-Cola has increased its dividend payments for over 5 decades. The company clearly possesses a strong competitive advantage. Coca-Cola’s competitive advantage stems from its powerful brands.
The company supports its brands by spending over $3 billion per year on advertising. Coca-Cola can spend more on advertising than any other beverage company (except for perhaps PepsiCo). This further reinforces its competitive advantage.
Coca-Cola’s earnings-per-share growth will come from a mix of global expansion and operating efficiency increases. The company is using its global distribution power to leverage popular smaller drink brands and sell them worldwide.
An example of this is the company’s acquisition of Monster’s non-energy drink brands like Hubert’s Lemonade and Hanson’s juice drinks. Coca-Cola is taking several steps to improve operating efficiency, including:
- Decentralize decision making
- Refranchise U.S. bottling operations
- Better align employee incentives with company goals
Despite being an old company, Coca-Cola still has plenty room for growth. In addition, the company is very shareholder friendly.
Coca-Cola currently has a high dividend yield of 3% to go with solid share repurchases. Over the last 5 years, the company has repurchased about 1.2% of shares outstanding per year.
Share repurchases combined with the company’s dividend gives investors a shareholder yield of ~4%. Total returns for Coca-Cola should be over 11% going forward from dividends (3.0) and earnings-per-share growth (7% or more per year).
10 – cc (WFC)
Dividend Yield: 3.2%
Price-to-Earnings Ratio: 11.2
Years of Steady or Rising Dividends: 7
Percent of Warren Buffett's Portfolio: 18.1%
10 Year Book-Value-Per-Share Growth Rate: 12.0%
Wells Fargo is Berkshire Hathaway’s 2nd largest holding. Kraft-Heinz is Buffett’s largest holding.
Warren Buffett has 19.0% of his portfolio allocated to Wells Fargo. The company has grown to become the largest bank in the U.S. based on its $237 billion market cap. For comparison, Chase (JPM) has a $207 billion market cap.
Wells Fargo’s growth over the last decade has been impressive. The company has managed to compound book-value-per-share at 12% a year.
Wells Fargo’s growth does not come from unnecessary risks. The company managed to remain profitable throughout the Great Recession of 2007 to 2009. Dividend investors were not happy with results, however. Wells Fargo cut its dividend payments in 2009 and again in 2010. Amazingly, Wells Fargo’s book-value-per-share actually increased in 2008 and 2009 when the financial world was in a full-on meltdown.
Wells Fargo’s operations are divided into 3 primary segments:
- Community Banking
- Wholesale Banking
- Wealth/Brokerage/Retirement
The company’s Community Banking segment is its largest, followed by wholesale banking. Together, these 2 segments generate over 90% of Wells Fargo’s income.
The Wells Fargo brand is well known in the United States. Wells Fargo has a carefully honed reputation for trust and good service. This has grown the company to become the number 1 in the U.S. in the following categories:
- Middle market commercial lender
- Commercial real estate originator
- Small business lender
- Mortgage originator
- Retail deposits
- Auto lender
Rising interest rates will benefit Wells Fargo. Rising interest rates tend to increase the spread on interest earned and interest paid on deposit accounts.
This makes Wells Fargo a good choice to partially hedge against rising interest rates.
Wells Fargo currently trades for a price-to-earnings ratio of just 12.2. This is well below the S&P 500’s 20+ price-to-earnings-ratio.
Wells Fargo is clearly superior to both the average bank and the average business in the S&P 500. The company’s low price-to-earnings ratio is very reasonable. These shares are likely trading at a discount to fair value. Now is a good time for dividend growth investors looking to start a position in this market-leading bank.
9 – The Kraft Heinz Company (KHC)
Dividend Yield: 3.2%
Price-to-Earnings Ratio: 23.9 forward P/E ratio
Years of Steady or Rising Dividends: 45 (including history with Kraft, Mondelez, and Philip Morris)
Percent of Warren Buffett's Portfolio: 19.2%
10 Year Earnings-Per-Share Growth Rate: N/A due to recent merger
Warren Buffett recently decided to drastically increase his ownership in Kraft Foods. He teamed up with 3G Capital to merge Kraft with Heinz.
The merger between Kraft and Heinz gives Berkshire Hathaway and 3G control of 51% of the new company. Kraft shareholders own the remaining 49% of the newly combined Kraft-Heinz company.
The merger builds on the success of 3G Capital. 3G Capital has generated excellent returns by purchasing and aggressively expanding United States brands. 3G Capital’s prior success stories include Budweiser (BUD) and Burger King.
3G Capital’s methodoly pairs well with Warren Buffett's. Together they make an ideal team for purchasing and expanding high quality brands in slow changing industries.
Shareholders will benefit from synergies in the recently formed company. The management expertise of 3G Capital and Warren Buffett is a bonus.
Kraft’s dividend payments are continuing following the merger. The company’s regular share repurchases are scheduled to be suspended for 2 years following the merger.
Kraft Heinz has 8 brands that generate $1 billion or more a year in sales. The combined company is expected to generate about $28 billion in sales per year.
Close to $22 billion of those sales will come from North America. This makes Kraft-Heinz the 3rd largest food and beverage corporation in North America based on sales. Only PepsiCo (PEP) and Nestle are larger.
The infographic below (from Kraft’s investor relations) shows the company’s brands and key statistics:
8 – General Electric (GE)
Dividend Yield: 3.3%
Price-to-Earnings Ratio: 15.9 (forward P/E ratio)
Years of Steady or Rising Dividends: 6
Percent of Warren Buffett's Portfolio: 0.3%
10 Year Earnings-Per-Share Growth Rate: -1.0%
General Electric the world’s 2nd largest conglomerate based on its’ $284 billion market cap.
Berkshire Hathaway is the only larger conglomerate. Berkshire Hathaway has a market cap of $314 billion.
General Electric shareholders will likely see strong returns over the next few years.
The company is committed to divesting its financial business. General Electric is focused on becoming a true manufacturing conglomerate. The company got into trouble by focusing on financial services.
General Electric is undoing this long-standing strategic error by divesting its GE Capital business. The company has already divested large portions to Wells Fargo and Blackstone Group.
General Electric also recently spun-off its retail finance and credit card division – Synchrony Financial (SYF).
The divestiture of GE Capital is a positive sign for General Electric shareholders. The company is focusing on what it does best. Namely, manufacturing a diverse range of products.
General Electric’s management is actively seeking to make the company smaller and more profitable. When this happens there is a high likelihood shareholders will see strong gains.
General Electric currently trades at a forward price-to-earnings ratio of 15.9. Additionally, the company has an above average 3.3% dividend yield.
Investors in General Electric today will likely do much better than they have done over the last decade. This is thanks to the company’s:
- reasonable forward price-to-earnings ratio
- high dividend yield
- large divestiture plans.
General Electric appears to be trading around fair value given its forward price-to-earnins ratio.
7 – Procter & Gamble (PG)
Dividend Yield: 3.2%
Price-to-Earnings Ratio: 20.8
Years of Steady or Rising Dividends: 59
Percent of Warren Buffett's Portfolio: 3.6%
10 Year Earnings-Per-Share Growth Rate: 5.8%
Warren Buffett exchanged $4.3 billion worth of Procter & Gamble shares for Duracell.
Even after this transaction, Buffett still has a large holding in Procter & Gamble.
Procter & Gamble shed its non-core and underperforming brands in 2015. The company has streamlined operations. Procter & Gamble’s managemetn is wisely focusing on the company’s core brands.
Core brands by category are listed below:
- Oral Care: Key brands are Crest and Oral-B
- Baby Care: Key brands are Pampers and Loves
- Family Care: Key brands are Bounty and Charmin
- Feminine Care: Key brands are Always and Tampax
- Grooming: Key brands are Gillette, Venus, and Braun
- Fabric Care: Key brands are Tide, Ariel, Gain, and Downy
- Personal Health Care: Key brands are Metamucil and Nyquil
- Skin & Personal Care: Key brands are Olay, SK-II, and Old Spice
- Home Care: Key brands are Dawn, Febreeze, Swiffer, and Cascade
- Hair Care: Key brands are Pantene, Head & Shoulders, Herbal Essence, and Rejoice
Procter & Gamble has performed well since refocusing its operations on core brands. The company’s growth in earnings is being fueled by increasing operating efficiency and cost-cutting.
Procter & Gamble has a low-risk business model. The company owns well-known brands that operate in slow-changing industries. Procter & Gamble supports its brands with massive advertising spending of $8 to $9 billion a year.
The company is expecting 4% to 9% constant-currency adjusted earnings-per-share growth in fiscal 2016.
Procter & Gamble appears to be a bit overvalued at current prices based on its current price-to-earnings ratio of 20.8. The company makes a more compelling purchase at a price-to-earnings ratio under 18.
6 – Suncor Energy (SU)
Dividend Yield: 3.7%
Price-to-Earnings Ratio: 18.8 (forward P/E ratio)
Years of Steady or Rising Dividends: 24
Percent of Warren Buffett's Portfolio: 0.6%
10 Year Earnings-Per-Share Growth Rate: 3.6%
Suncor Energy is one of Canada’s leading oil sands companies.
The company generates the bulk of its earnings from the exploration, acquisition, development, transport, and refining of oil sands.
Suncor Energy has a market cap of $32.6 billion and was founded in 1917. The company has paid steady or increasing dividends (in Canadian Dollars) for 24 consecutive years.
Suncor Energy’s investing thesis is very simple. The company is one of North America’s lowest cost oil producers thanks to exposure to the Canadian oil sands.
The company’s cash operating costs to produce a barrel of oil from its oil sands operations is just $28. The company will generate positive cash flows as long as oil says above this price.
Suncor Energy is focusing on cost control to further reduce its cash operating costs of production.
Suncor’s volume prodution rose (slightly) in 2015 despite low oil prices.
Suncor currently has an above average dividend yield of 3.7%. Shareholders in Suncor Energy should see solid earnings-per-share growth when oil prices recover.
The company will likely remain profitable while oil prices are depressed because of its low cost of production.
The downside to investing in Suncor Energy is its above average price-to-earnings ratio compared to other oil corporations. This is offset by the company’s low cost of production. With that said, there are much better bargains in the oil industry today than Suncor.
5 – Sanofi (SNY)
Dividend Yield: 4.1%
Price-to-Earnings Ratio: 17.6
Years of Steady or Rising Dividends: 21
Percent of Warren Buffett's Portfolio: 0.1%
10 Year Earnings-Per-Share Growth Rate: 2.5%
Sanofi is a global pharmaceutical company with a market cap of $103 billion.
The company is headquartered in Paris, France. In 2014, Sanofi generated its revenue from the following sources:
- 80% from Pharmaceuticals
- 13% from Vaccines
- 7% from Animal Health
The company has significant exposure to emerging markets. Around 1/3 of sales come from emerging markets.
Sanofi has reached a ~$100 billion market cap because of its research and development department. The company’s ability to roll out new and innovative treatments drives revenue.
Fortunately for shareholders of Sanofi, the company’s number of product launches is increasing. From 2007 to 2013, the company launched 10 products. From 2014 to 2020, Sanofi is expecting 18 product launches.
The image below from Sanofi’s Exane Health Care Conference Presentation shows expected launches to 2020.
Sanofi is a shareholder friendly company. The company has increased its dividend payments each year for the past 21 years (measured in Euros, not USD).
The company is also a net share repurchaser. Sanofi has reduced its net share count by about 1% in the last 2 years. Sanofi will likely continue to increase share repurchases to increase the value of each share. Sanofi’s 4%+ dividend yield combined with its share repurchase makes for a 5%+ shareholder yield.
Sanofi’s current price-to-earnings ratio of 17.6 appears reasonable given its shareholder friendly management. The company is expecting solid growth from its new launches over the coming several years.
4 – IBM (IBM)
Dividend Yield: 4.0%
Price-to-Earnings Ratio: 9.4
Years of Steady or Rising Dividends: 24
Percent of Warren Buffett's Portfolio: 8.5%
10 Year Earnings-Per-Share Growth Rate: 9.2%
Warren Buffett is known to avoid technology stocks. He has repeatedly discussed preferring slow changing industries and simple-to-understand businesses…
Competitive advantages in slow changing industries tend to last much longer than those in fast changing industries.
With that said, Warren Buffett made an exception with IBM first began purchasing shares of IBM in 2011 – which shocked the investing world as it deviated from his long-time approach of skipping over technology companies.
IBM’s long history of profitability sets it apart from many other technology companies. IBM was founded in 1911 and has grown over the last 100+ years to reach a market cap of $168 billion.
IBM realized above-average earnings-per-share growth of 9.2% a year over the last decade. This growth was a result of increased operating efficiency and resulting margin enhancement. IBM’s revenue has actually declined by 1.3% a year over the last decade.
IBM has struggled recently. The company is repositioning itself for growth. It recently divested its System X (mainframes) and Customer Care business segments. IBM is divesting itself of lower margin businesses and investing several billion dollars into areas it believes offer much better growth potential:
- Cloud computing
- Mobile computing
- Analytics
- Information security
The company saw 26% constant currency revenue growth in these key areas in fiscal 2015. Unfortunately for IBM, this growth has not offset declines in its core business.
The problem with IBM is that it exists in the rapidly changing technology sector. IBM is having difficulty keeping pace in the ever-changing industry, and this is reflected in the company’s declining revenue and earnings-per-share.
Like many of Warren Buffett's other top dividend stock holdings, IBM is a shareholder friendly business. The company currently has a 4.0% dividend yield.
Additionally, IBM has repurchased about 5% of its shares outstanding each year over the last decade for a total shareholder yield of around 9%.
Poor recent performance has caused IBM’s price-to-earnings ratio to fall significantly. The company is currently trading at a price-to-earnings ratio of just 9.4.
The company’s low price-to-earnings ratio helps offset the business obsolescence risks IBM faces. Still, the company’s future and ability to generate rising earnings-per-share over the long run is not as certain as many of Buffett’s other high yield dividend holdings.
3 – Verizon (VZ)
Dividend Yield: 4.4%
Price-to-Earnings Ratio: 12.6
Years of Steady or Rising Dividends: 31
Percent of Warren Buffett's Portfolio: 0.6%
10 Year Earnings-Per-Share Growth Rate: 7.5%
Verizon is the third highest yielding stock in Warren Buffett's portfolio thanks to its 4.4% dividend yield.
The company is also the wireless leader in the United States. Verizon controls 34% of the wireless market in the U.S., with AT&T (T) controlling another 31%.
Verizon, AT&T, T-Mobile, and Sprint together account for 90% of the wireless industry in the United States. The oligopolistic wireless industry is not good for consumers – but great for the businesses in the industry which reap above market rate profits from the lack of competition.
Verizon positined itself for future growth in 2015:
- The company is selling its wireline assets in California, Florida, and Texas to Frontier Communications (FTR) for $10.5 billion.
- Verizon is leasing the rights to over 11,300 of its company owned towers to American Tower Corporation (AMT), as well as sell American Tower Corporation 130 towers for an upfront payment of $5 billion
- The company acquired AOL & Millennial Media to focus on content distribution and advertising
- Verizon released its Hum automotive device and its Go90 mobile content service.
In addition to its intelligent strategic moves, Verizon is seeing strong growth in its wireless segment.
The company is benefiting as more-and-more consumers use increasing amounts of data on their smart phones and tablets. The trend toward more data has given Verizon a 7.5% earnings-per-share growth rate over the last several years.
Investors in Verizon should expect total returns of ~12% a year from the company. Total returns will come from dividends (~4.5%) and earnings-per-share growth (~7.5%).
Verizon appears undervalued at this time relative to its total return prospects considering its forward price-to-earnings ratio of just 12.6.
The company’s mix of stability, growth prospects, and a high yield make it a favorite of The 8 Rules of Dividend Investing.
2 – General Motors (GM)
Dividend Yield: 5.1%
Price-to-Earnings Ratio: 5.6
Years of Steady or Rising Dividends: 2
Percent of Warren Buffett's Portfolio: 1.2%
10 Year Earnings-Per-Share Growth Rate: N/A
General Motors (in)famously declared chapter 11 bankruptcy in 2009. In 2013, the United States sold the last of its General Motors stock. The company is now fully private (not owned by the government, but publicly traded) once again.
General Motors has been profitable every year since relisting on the stock market in 2010. General Motor’s is the United States largest automobile manufacturer. The company has around 17% market share in the United States car and truck market.
Around 40% of the company’s revenue is now generated overseas. General Motors is one of the United States larger exporters.
General Motors has strong growth prospects ahead. The company is expected to compound its earnings-per-share at around 5% to 6% a year going forward.
The company is realizing higher operating income margins now thanks to its focus on cost control. The company is seeing solid growth in its joint venture in China. China sales grew 14.2% in the company’s most recent quarter.
Growth in China should come in slower this year due to the slow-down in the country’’s economy.
General Motors’ high dividend yield and low price-to-earnings ratio should appeal to value oriented investors. The company has a low payout ratio of just 27%. Which gives investors plenty of protection if earnings fall due to the global growth slowdown.
General Motors will likely increase dividend payments in excess of its earnings-per-share growth rate over the next several years (meaning the payout ratio will rise).
General Motors makes a compelling investment at current prices due to its exceptionally low price-to-earnings ratio combined with its high dividend yield. If the company hits its expected earnings-per-share growth rate, investors will see double-digit total returns. Investors will likely see additional gains as the company’s price-to-earnings ratio rises.
A price-to-earnings ratio of under 6 is far too low for a company with positive expected growth, especially in today’s overvalued market.
1 – AT&T (T)
Dividend Yield: 5.2%
Price-to-Earnings Ratio: 13.7
Years of Steady or Rising Dividends: 32
Percent of Warren Buffett's Portfolio: 1.8%
10 Year Earnings-Per-Share Growth Rate: 1.3%
Warren Buffett is invested in both AT&T and Verizon. He clearly finds the United States telecommunications market a favorable investment.
The oligopolistic nature of the telecommunications market in general – and especially the wireless market (as covered in the Verizon analysis above) have allowed AT&T to pay rising dividends for 32 consecutive years.
AT&T is Buffett’s highest yielding stock thanks to its current 5%+ dividend yield. AT&T maintains its high dividend by having a high payout ratio. The stock’s payout ratio is currently 71%.
Don’t be fooled by AT&T’s anemic growth over the last decade… The company has changed its growth strategy.
AT&T’s future growth will be fueled by its recent acquisitions. Recent acquisitions are shown in the image below:
Source: AT&T 2015 Analyst Presentation, slides 39 and 42
The company has been acquiring telecom companies in Mexico to gain exposure in the country. Mexico is the first logical step for international expansion for AT&T because of the country’s geographic proximity to the United States.
Additionally, AT&T recently acquired DirecTV to become the largest pay-tv company. The move positions AT&T for future growth and gives them access to South American markets as DirecTV has sizeable market share in South America.
Going forward, AT&T should compound its earnings-per-share faster over the next decade than it did in the previous decade. Warren Buffett's vote of confidence in the company (it is a recent purchase for the Oracle of Omaha) bodes well for potential investors in this high yield stock. Additionally, the company has a low price-to-earnings ratio of under 14.
Final Thoughts
Warren Buffett is possibly the greatest investor of all time.
His portfolio is loaded with ultra-high quality businesses that are likely to compound shareholder wealth over long periods of time.
With that said, being a prudent investor requires more than copying Warren Buffett's every move. Instead, intelligent investors should learn from Warren Buffett and analyze his investments themselves to see if each matches your personal investing style.
Examining the highest yielding stocks in Warren Buffett’s portfolio is an excellent place to look for candidates to include in your dividend growth portfolio.
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