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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| August 27, 2019
Berkshire Hathaway (BRK.B) famously doesn’t pay dividends – it has better things to do with its shareholders’ cash – but Chairman and CEO Warren Buffett sure loves collecting them. In 2018 alone, Berkshire raked in $3.8 billion in dividends – “a sum that will increase in 2019,” Buffett said in the annual letter.
The great majority of the stocks in Berkshire’s portfolio are dividend stocks. And, indeed, all of its top 10 holdings – from Apple (AAPL) to Coca-Cola (KO) to American Express (AXP) – pay a cash distribution.
Buffett has never been one to reach for yield, but a number of Berkshire Hathaway’s income-generating equities are quite generous by today’s standards. As of Aug. 26, nine of Warren Buffett’s dividend stocks sported yields of at least 3%. (For comparison, the yield on the S&P 500 is just below 2%.)
After excluding names that are now negligible parts of Berkshire Hathaway’s portfolio – namely, United Parcel Service (UPS) – these are the Warren Buffett dividend stocks with the highest yields.
Stock prices and other data are as of Aug. 26. Holdings are as of June 30. Stocks are listed by dividend yield, from lowest to highest. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Sources: Berkshire Hathaway’s SEC Form 13F filed Aug. 14, 2019, for the reporting period ended June 30, 2019; and WhaleWisdom.
Shares held: 80,937,250
Holding value: $3.3 billion
Dividend yield: 3.0%
Despite its impressive-sounding moniker, Bank of New York Mellon (BK, $41.11) is not exactly a household name. But it’s a big deal in financial services, and Warren Buffett has been a fan for some time.
Bank of New York Mellon is America’s ninth-largest bank by assets. More specifically, it is a custodian bank that holds assets for institutional clients and provides back-end accounting services. Berkshire Hathaway first took a position in BK during the third quarter of 2010, when it paid an estimated average price of $43.90. Warren Buffett last added to Berkshire’s stake during the fourth quarter of 2018, when he increased his holding company’s investment by 3%, or more than 3 million shares.
BK is one of several Buffett dividend stocks from the financial sector, and it sports a healthy recent history of payout growth. The bank last raised its quarterly dividend in July, to 31 cents per share – 82% higher than where it was five years ago.
Better still, there’s plenty more room for the dividend to expand going forward. Bank of New York Mellon’s payout ratio (the percentage of its earnings that it pays out in dividends) is just 29% – a healthy ratio by any standard, and lower than that of its biggest custodian bank rivals State Street (STT) and JPMorgan Chase (JPM).
Shares held: 59,514,932
Holding value: $6.4 billion
Dividend yield: 3.4%
Speaking of JPMorgan Chase (JPM, $106.87), Warren Buffett has been going all in on big banks over the past year, so it seems like it was only a matter of time before Berkshire Hathaway initiated a position in the nation’s largest bank by assets.
Berkshire first bought JPM in the third quarter of 2018 and has been boosting it ever since.
Part of the attraction for JPMorgan is Warren Buffett’s professed admiration for CEO Jamie Dimon. The two have partnered with Jeff Bezos, chairman and CEO of Amazon.com (AMZN), to form a health care initiative intended to improve coverage and lower costs. Dimon and Buffett also teamed up to decry the practice of giving quarterly profit forecasts, saying “short-termism is hurting the economy.”
JPMorgan, like most of the big banks, cut its dividend during the Great Recession and financial crisis – from 38 cents quarterly at its peak in 2009, down to 5 cents per share that same year. However, it was one of the quickest and most aggressive banks in rebuilding its cash distribution, propping its payout back up to 25 cents quarterly in 2011. Since then, the dividend has exploded 220% to its current quarterly dole of 80 cents per share.
Shares held: 18,621,674
Holding value: $688.1 million
Dividend yield: 3.6%
It was notable when Buffett revealed Berkshire’s position in Store Capital (STOR, $36.95) in the summer of 2017. Prior to Store, real estate investment trusts (REITs) – a way to invest in real estate without owning the actual assets – were never big among Buffett holdings.
But the income-friendly nature of REITs fits right in with the Oracle of Omaha’s love for dividend stocks.
REITs are required to pay out at least 90% of their income to shareholders as dividends – a quid pro quo for generous federal tax benefits. As a result, real estate almost always out-yields the market and is among the highest-paying sectors on Wall Street. Store Capital’s yield of 3.6% is actually below that of the FTSE Nareit All Equity REITs Index of U.S.-listed REITs (about 3.7%), yet still far better than the broader-market average.
Store invests in a widely diversified set of single-tenant properties, spanning 109 different industries. It’s a bet on brick-and-mortar retail, which was thought to be in permanent decline – but it’s largely a bet on the retailers that have the least to lose from the rise of e-commerce. Chain restaurants, early childhood education centers, health clubs and movie theaters are Store’s greatest sources of base rent.
Buffett spied value here – and he spied it for quite some time. Store Capital CEO Christopher Volk told CNBC that Buffett studied the REIT for three years before taking the plunge. Now, BRK.B owns 18.6 million shares. Berkshire’s 8.2% stake makes it Store Capital’s second-largest shareholder after Vanguard.
Shares held: 8,671,054
Holding value: $1.1 billion
Dividend yield: 3.7%
PNC Financial Services (PNC, $124.10), the nation’s sixth-largest bank by assets and second-largest regional lender, is another part of a big recent bet by Buffett on financial-sector dividend stocks.
PNC’s dividend history over the past decade follows the same script as JPMorgan’s: A severe hack-and-slash job to the payout in 2009, followed by a robust hike in 2011 and large increases ever since. In PNC’s case, it cut dividends from 66 cents quarterly to a dime in 2009, then raised it to 35 cents quarterly in 2011. The payout has rocketed 229% since then, including a generous 21% hike announced in July.
Buffett first started investing in PNC during the third quarter of 2018. He upped Berkshire Hathaway’s stake by another 4% in Q1 2019. The holding company is now PNC’s 10th-largest investor with 1.9% of the bank’s shares outstanding.
Buffett has long been comfortable with investing in the banking business. At the 1995 Berkshire Hathaway annual meeting, he said the industry “falls within our circle of competence to evaluate.” Given Berkshire’s big push into banks over the past few quarters – BRK.B has added to or started new positions in more than a half-dozen financial stocks recently – Buffett clearly sees a lot of value in this corner of the market.
Shares held: 5,552,715
Holding value: $534.8 million
Dividend yield: 3.8%
Phillips 66 (PSX, $96.31) is one of only two Berkshire Hathaway investments in the energy sector. Berkshire’s stake in the oil-and-gas company dates to 2012, when it was spun off of ConocoPhillips (COP).
PSX has been a model among dividend stocks, steadily raising its dividend since its trading debut – the current quarterly payout of 90 cents represents a 350% increase over its first disbursement of 20 cents in 2012. But that hasn’t been enough of a reason for Buffett to stick around.
Indeed, despite having heaped praise on PSX in the past, Buffett has dramatically reduced his stake over the past year or so.
In the first quarter of 2018, he sold a whopping 35 million shares, reducing Berkshire’s stake by more than 40%. To be fair: That move was simply made to avoid regulatory headaches. Indeed, the purchaser of the shares was none other than PSX.
The thing is, Buffett continues to burn off Berkshire Hathaway’s PSX holdings. Even after the big sale back to Phillips 66 in early 2018, BRK.B remained the company’s largest shareholder with 9.8% of all shares outstanding. But Buffett kept selling. In the first quarter of 2019 alone, he pared Berkshire’s stake by another 53%. Berkshire now owns just 1.2% of Phillips 66’s shares outstanding.
Buffett has been characteristically mum on his reasons for the sales.
Shares held: 72,269,696
Holding value: $2.6 billion
Dividend yield: 4.2%
Warren Buffett first took a stake in General Motors (GM, $36.25), the world’s fourth-largest auto manufacturer by production, in early 2012. He most recently upped Berkshire Hathaway’s holdings during the fourth quarter of 2018, when he increased his position by 37%.
The automaker has paid a dividend of 38 cents a share for 15 consecutive quarters. From 2015 to 2018, GM regularly disbursed $2.2 billion to $2.3 billion every year in dividends. In many ways, General Motors looks like a classic Buffett value bet – but not just because it’s a dividend stock.
For one, General Motors is an iconic American brand and, as the No. 1 domestic automaker, a bet on the long-term growth of the U.S. economy. Buffett has sung the praises of GM CEO Mary Barra several times, at one point saying, “Mary is as strong as they come. She is as good as I’ve seen.”
GM also looks great from a valuation perspective. Admittedly, Buffett hasn’t gotten his money’s worth from General Motors. Buffett paid an estimated average price per share of $31.82 when he initiated his position in the first quarter of 2012. Including dividends, GM has returned just 77% since March 31, 2012, versus 137% for the S&P 500. But the stock currently is bargain-priced: It trades at a meager 5.6 times expected earnings, and at less than half its past year’s worth of sales, according to data from Refinitiv.
Shares held: 409,803,773
Holding value: $18.4 billion
Dividend yield: 4.5%
Wells Fargo (WFC, $44.98) has been roiled by a series of scandals since 2016, including opening millions of phony accounts, modifying mortgages without authorization and charging customers for auto insurance they did not need.
But Buffett has stood firmly behind the nation’s fourth-largest bank by assets. The fact WFC has been a reliable dividend payer certainly helps the case for owning shares. Most recently, in July, Wells Fargo hiked its quarterly payout by 13% to 51 cents per share. The company also plans to buy back up to $23.1 billion of its own stock over the next four quarters.
Operationally, WFC is holding up OK too, Buffett notes.
“If you look at Wells, through this whole thing they’re uncovering a whole lot of problems, but they aren’t losing any customers to speak of,” Buffett told Financial Times in an April interview.
Berkshire Hathaway first bought shares in WFC in 2001. Although Buffett pared the stake by 3%, or 17 million shares, during the first quarter of 2019, Wells Fargo still is an outsize holding in Berkshire’s portfolio. Berkshire remains WFC’s largest shareholder with 8.4% of all shares outstanding.
Shares held: 10,758,000
Holding value: $302.6 million
Warren Buffett made a rare energy-sector bet during the fourth quarter of 2018, when he initiated a position in Suncor Energy (SU, $28.13). SU is a rarity among Buffett stocks, seeing as it’s not U.S.-based, but the hefty dividend fits right in.
The payout is rock-solid, if history is any guide. Suncor is a member of the Canadian Dividend Aristocrats – our northern neighbor’s set of payout-hiking dividend stocks – by virtue of having hiked its regular cash distributions annually for 17 consecutive years. The company most recently upped its payout in February, to 42 Canadian cents a share from 36 Canadian cents a share – a 16.6% increase. (It also announced board approval of another C$2 billion in stock buybacks.)
If this bet on Canada’s biggest oil-and-gas company sounds familiar, it should: This is the second time Berkshire Hathaway has taken a stab at Suncor. The company originally invested in the energy giant in 2013, then sold the entirety of the position three years later.
Suncor – an integrated energy giant whose operations span oil sands developments, offshore oil production, biofuels and even wind energy – also sells its refined fuel via a network of more than 1,500 Petro-Canada stations.
Shares held: 325,634,818
Holding value: $8.3 billion
Dividend yield: 6.3%
Warren Buffett was one of the driving forces behind the 2015 merger of packaged-foods giant Kraft Foods and ketchup purveyor H.J. Heinz to create Kraft Heinz (KHC, $25.58). It’s Berkshire’s sixth-largest stock investment with a current market value of $8.3 billion.
And Buffett regrets it.
Berkshire Hathaway recorded a $3 billion non-cash loss from an impairment of intangible assets in 2018, “arising almost entirely from our equity interest in Kraft Heinz,” Buffett wrote in his 2019 letter to shareholders.
More succinctly, in an interview with CNBC, Buffett said “I was wrong” on KHC. “We overpaid for Kraft.”
Kraft Heinz slashed its dividend by 36% in February to an annualized $1.60 a share from $2.50 a share, yet it still yields north of 6%. That’s because KHC’s share price has plunged by 41% (as share prices go down, yields go up). Such an elevated yield might look tempting, but most Wall Street analysts wouldn’t touch Kraft at current levels. Out of 21 analysts tracked by S&P Global Market Intelligence, two rate the stock at Strong Buy, 15 call it a Hold, one says Sell and three call KHC a Strong Sell.