Berkshire Hathaway (BRK.A 1.35%) (BRK. B 1.26%) CEO Warren Buffett has been a wealth-building machine longer than most Americans have been alive. Since assuming the position of CEO in 1965, he has overseen the creation of more than $660 billion in shareholder value and has delivered a total return on his company’s Class A shares of 3,641,613% through December 31, 2021.
The Oracle of Omaha’s recipe for success is to buy quality branded companies and let those companies grow over several years or decades. But the unheralded stars in Warren Buffett’s portfolio are mostly dividend stocks.
Companies that regularly pay a dividend are often recurringly profitable and have proven themselves. Perhaps more importantly, they have an impressive track record of drawing circles around their peers that don’t pay off over long periods of time.
Warren Buffett understands how important dividend income can be, and has filled Berkshire Hathaway’s portfolio with income stocks that yield well above the company’s average yield S&P500. What follows are the six top-performing stocks in Warren Buffett’s portfolio as of last weekend (but taking into account the company’s recent Form 13F filing).
1. STORE Capital: 5.27% return
If you want to ride Warren Buffett’s coattails into the highest yield possible, look no further than a Real Estate Investment Trust (REIT). SAVE capital (STURGEON -0.03%) at 5.3%. In order to avoid normal corporate tax rates, REITs must return most of their profits to their shareholders as dividends.
The not-so-subtle secret of STORE’s success is its triple-net leases. Triple-net leases, sometimes known as “NNN leases,” require the tenant to cover all real estate expenses. This includes maintenance, utility bills and even the insurance and taxes associated with the property. Although triple-net leases often result in lower rental rates because the tenant has more financial responsibility, it makes STORE’s operating cash flow as transparent and predictable as possible.
In addition, STORE Capital has focused on the purchase of so-called “profit center real estate” for medium-sized companies. In fact, STORE looks for properties that are essential to the companies to which it rents. This makes tenants far less likely to default on their rent payments.
2. Kraft Heinz: 4.14% yield
Packaged food and beverage company Kraft Heinz (KHC 0.70%) also pays out a generous dividend. Even after slashing its 2019 payout, the company remains in the high-yield category with a yield of over 4.1%.
Even though Warren Buffett has an incredible track record, even great investors are fallible. Berkshire Hathaway’s large stake in Kraft Heinz is a perfect example of this. Heinz grossly overpaid Kraft Foods in 2016, and the combined company’s balance sheet has paid for it ever since. Even with a goodwill writedown of more than $15 billion in 2019, the company’s balance sheet remains heavily indebted and with minimal room to reinvest in its brands.
The bright spot here is that the COVID-19 pandemic has encouraged consumers to eat at home more often. That has boosted sales of prepackaged and quick-to-prepare meals and snacks, which is at the heart of Kraft Heinz’s operating model.
3. US Bancorp: 3.77% yield
Long-standing inventory U.S. Bancorp (USB 0.45%) is another rock-solid income stock hiding in Buffett’s portfolio. The relatively high yield of 3.8% reflects the superior return on assets (ROA) among larger bank stocks.
While most money center banks ran into serious trouble during the financial crisis by chasing riskier derivative investments, US Bancorp’s management team has mostly stuck to the bread and butter of banking: loan and deposit growth. It’s not sexy by any means, but it’s a proven way for banks to grow their profits and payouts over the long term.
What really sets US Bancorp apart is the company’s digital commitment. As of May 31, 2022, 82% of active customers were banking digitally. This includes 64% of all loan sales completed online or through a mobile app, up from just 45% in early 2020. Online and mobile-based transactions are essentially cheaper for banks than face-to-face or phone interactions. It’s just another reason why US Bancorp is an ROA beast among bank stocks.
4. Citigroup: 3.75% yield
Not far behind US Bancorp’s yield is the financial giant Citigroup (C 0.20%). While Citigroup has endured its struggles and changes over the past decade, it hasn’t hurt the company’s ability to easily outperform the average return (1.7%) of the broad-based S&P 500.
Perhaps the biggest catalyst for Citi right now is historically high inflation. With the Federal Reserve having little choice but to aggressively manage interest rates to tame inflation, bank stocks should see a healthy increase in net interest income on outstanding adjustable-rate loans. And to be clear, the country’s central bank doesn’t seem close to ending its tight monetary policy.
Citigroup should also benefit from the cyclical nature of the banking industry. Although bank stocks like Citi are vulnerable to rising loan defaults and writedowns during times of economic contraction and recession, the US and global economy spends far more time expanding than it does contracting. Patience usually pays off in the banking industry.
5. Paramount Global: 3.67% yield
Another relatively new holding that is generating a sizeable return for the Oracle of Omaha is a media and entertainment company Paramount Global (SECTION 2.41%). Paramount’s yield of nearly 3.7% is about two percentage points above the S&P 500’s dividend yield.
The logical catalyst for Paramount this decade will be its streaming push. As consumers move away from traditional cable bundles and toward less-expensive, screw-on streaming packages, Paramount+ has made significant gains. Even after the services were removed from Russia, direct-to-consumer subscribers grew to nearly 64 million worldwide. Paramount+ added 3.7 million net subscribers in the second quarter.
However, Paramount is also reaping the rewards of at least some moviegoers returning to the movies. Although cinema admissions have been declining since 2002, Top Gun: Maverick led the company’s movie entertainment segment to more than double its revenue in the June quarter. If movie attendance continues to normalize closer to pre-pandemic levels, Paramount’s payout could grow even more over time.
6. Chevron: 3.55% yield
Last but not least, Big Oil is known for paying some hefty dividends and integrated oil stocks rafters (CVX -0.26%) is no exception. The $5.68 per share that Chevron gives out each year yields nearly 3.6%. Embark on a stock buyback of up to $10 billion in 2022, and it’s easy to see why Warren Buffett invested in this stock.
There’s a decent chance that Chevron, a Dividend Aristocrat, won’t have trouble growing its payout for the foreseeable future thanks to disruptions to the world’s energy supply chain. Major energy companies have significantly reduced their capital investments during the COVID-19 pandemic. Add to this the Russian invasion of Ukraine and there is a real possibility that supply shortages could push up crude oil and natural gas prices for years to come.
On the other hand, Chevron’s secret weapon could be its integrated operating structure. Though it gets its juiciest margins from drilling, the company also owns transmission pipelines, refineries, and chemical plants.
Midstream pipelines typically rely on volume-based, fixed-fee contracts, which is a fancy way of saying they generate highly predictable cash flow no matter how volatile energy commodity prices are. Meanwhile, downstream operations such as refineries and chemical plants benefit when input costs (ie crude oil prices) fall. In other words, Chevron is well established in the oil and gas space.