Warren Buffett’s Best High Dividend Stocks – August 2016 Update
Warren Buffett’s Berkshire Hathaway outperformed the S&P 500 by 11.1% per year from 1965-2015, generating an overall gain of 1,598,284% compared to the market’s total return of 11,355%.
It’s no wonder why investors closely monitor Warren Buffett’s portfolio. He is arguably the greatest investor of all time.
While Berkshire Hathaway itself does not pay a dividend because it prefers to reinvest all of its earnings for growth, Warren Buffett has certainly not been shy about owning shares of dividend-paying stocks, and we will analyze each of Buffett’s dividend stocks in this article.
A dividend is often the sign of a financially healthy and stable business that is committed to rewarding shareholders. These are some of the qualities Warren Buffett looks for when he invests.
August 2016 Portfolio Update
On Monday, August 15, 2016, new information was released about Berkshire Hathaway’s portfolio. At the end of June 2016, Warren Buffett owned a total of 44 publicly-traded stocks. Interestingly enough, 32 of these holdings pay a dividend, and several of them are high dividend stocks with yields in excess of 4%.
Apple (AAPL): after initiating a position in Apple at the beginning of this year, Berkshire raised its stake by more than 50% during the second quarter. Despite falling iPhone sales, Apple remains a cash cow. The company generated over $70 billion in free cash flow last fiscal year and has more than $61 billion in cash sitting on its balance sheet, providing plenty of optionality for future growth opportunities and continued dividend increases. With the world’s most valuable brand trading at just 13.1x forward earnings estimates, Berkshire continues to see value in the stock.
Phillips 66 (PSX): Buffett raised his stake in Phillips 66 by just 4% during the quarter. He has owned the stock since the second quarter of 2012 after the company was spun off from ConocoPhillips. PSX is feeling the downturn in energy markets (sales have fallen by more than 20% for six consecutive quarters), especially with refining margins recently narrowing. However, the business continues to own hard-to-replicate assets and is investing in midstream and chemicals operations for long-term, diversified growth. With a forward P/E ratio less than 14x, Buffett appears to see some value here.
Libery Global (LILAK): Berkshire Hathaway was not the only noteworthy manager buying up shares of Liberty Global’s Latin American and Caribbean operations. Bill Gates more than doubled his stake in the company as well in his portfolio of dividend stocks. This stock doesn’t pay any dividends but has interesting long-term growth potential as media and entertainment consumption rises in emerging markets over the coming decades.
Wal-Mart (WMT): Buffett sold 27% of his Wal-Mart shares during the second quarter. Wal-Mart now represents just 2.3% of Berkshire’s total portfolio value. Wal-Mart is finding earnings growth to be difficult to come by as it faces higher costs (e.g. rising minimum wage pressure and soaring healthcare costs) and stiff competition from online retailers. The business has struggled to replicate Amazon’s success with its own e-commerce site.
Wal-Mart’s e-commerce sales grew by just 7% last quarter, and the company recently shelled out more than $3 billion to acquire web retailer Jet.com in an effort to improve growth (not a great sign, in my view). With the stock rallying more than 20% from its low in January, Buffett saw an opportunity to reduce his position as he hunts for a company with better long-term growth prospects. If Wal-Mart does continue to fade, I suspect it will be a gradual decline. The dividend remains extremely safe.
Suncor (SU): Warren Buffett’s stake in Suncor was reduced by 25%. The slump in oil prices has hit many Canadian energy producers hard, and Suncor is no exception. Buffett’s stake in Suncor dates back to the second quarter of 2013, a time when oil prices were still healthy. While Suncor is an integrated energy company, its oil sands resource base generally costs more to produce from than conventional crude oil. With that said, the company is still one of the best positioned energy companies to get through the current downturn, and its dividend payment remains safe for the time being. Here’s what management said during last quarter’s earnings call:
“We believe our current operations can generate sufficient cash flow to cover sustaining capital and dividend obligations at Brent crude price of less than $40 per barrel. As our growth capital starts to decline starting in 2017, it is easy to see that we’ll quickly return to generating free cash flow even at relatively low forward strip prices and crack spreads, so we have good reason for optimism.”
Deere (DE): Berkshire trimmed its stake in Deere by 5%, reducing the stock to 1.4% of Buffett’s total portfolio value. It’s hard to read too much into a move this small, especially for a stock that doesn’t appear to be overpriced. Perhaps it’s an indication that Buffett isn’t overly excited about farm and construction machinery demand picking up anytime soon. Barring a much steeper decline in industry sales, I believe Deere’s dividend payment remains secure.
Warren Buffett's Investment Strategy
Warren Buffett has evolved as an investor since launching his original partnership in 1956. Back then, Warren Buffett’s portfolio was much smaller in size and allowed him to pursue the greatest inefficiencies he could find in the market almost irregardless of the stock’s market cap. He focused intensely on finding stocks trading at cheap valuations.
Buffett was not afraid to make a single position account for more than 25% of his portfolio and stated that he would be comfortable investing up to 40% of his net worth in a single security if the probabilities were deemed to be extremely in his favor, limiting risk.
Warren Buffett’s portfolio remains concentrated today, and his largest position accounts for just under 20% of Berkshire Hathaway’s portfolio. The idea behind running a concentrated portfolio is that there are relatively few excellent businesses and investment opportunities in the market at any given time, and owning too many positions reduces the impact from your few best ideas.
Importantly, Warren Buffett’s investment strategy has always been focused on the concept of staying within one’s circle of competence. Buffett has said that “risk comes from not knowing what you’re doing.”
In other words, never invest in a business or industry that is too hard for you to understand. The reality is, most investment opportunities fall outside of our circle of competence and should be ignored. Playing to your strengths is one of several tips to pick safer dividend stocks.
Since the days of his initial partnership, Buffett’s strategy has evolved to concentrate more on buying up wonderful businesses at reasonable prices rather than digging through the bargain bin for “cheap” stocks. He looks for companies that have strong economic moats and numerous opportunities for growth.
When Warren Buffett makes an investment, he has said that his favorite holding period is “forever.” The idea is to buy excellent companies with solid long-term growth prospects and let them compound over the long run.
Not surprisingly, our dividend