Berkshire Hathaway (BRK.A 1.35%) (BRK.B 1.26%) CEO Warren Buffett has been a wealth-creating machine longer than most Americans are alive. Since taking over as CEO in 1965, he has overseen the creation of more than $660 billion in shareholder value and generated an aggregate return for his company’s Class A shares of 3,641,613% , until December 31, 2021.
The Oracle of Omaha’s recipe for success is to buy high-quality branded businesses and allow those businesses to grow over several years or decades. But the unsung stars of Warren Buffett’s portfolio are, more often than not, dividend-paying stocks.
Companies that regularly pay a dividend are often profitable on a recurring basis and have a proven track record. Perhaps more importantly, they have an impressive track record of circles around their peers that don’t pay dividends for long periods of time.
Knowing how important dividend income can be, Warren Buffett has filled Berkshire Hathaway’s portfolio with income stocks that offer a yield well above the average yield of the S&P500. What follows are the six highest-earning stocks in Warren Buffett’s portfolio, as of last weekend (but taking into account the latest Form 13F filed by the company).
1. STORE Capital: 5.27% return
If you want to ride Warren Buffett’s ponytails to the highest yield possible, look no further than Real Estate Investment Trust (REIT) STORE Capital (STOCK -0.03%) at 5.3%. In order to avoid normal corporate tax rates, REITs are required to pay out the bulk of their profits as dividends to their shareholders.
The not-so-subtle secret to STORE’s success is its triple net leases. Triple net leases, sometimes referred to as “NNN leases”, require the tenant to cover all property expenses. This includes maintenance, utility bills, and even insurance and taxes associated with the property. Although triple net leases often result in lower rental rates since the tenant must bear greater financial responsibility, this makes STORE’s operating cash flow as transparent and predictable as possible.
Additionally, STORE Capital has focused on buying what it calls “profit center real estate” for middle market companies. Indeed, STORE searches for the essential goods for the companies it rents. This makes it much less likely that tenants will default on their rent.
2. Kraft Heinz: 4.14% yield
Packaged food and beverage company Kraft-Heinz (KHC 0.70%) also distributes a generous dividend. Even after cutting its payout in 2019, the company’s return of more than 4.1% puts it in the high-yield category.
Although Warren Buffett has an incredible track record, even great investors are fallible. Berkshire Hathaway’s large stake in Kraft Heinz is a perfect example. Heinz grossly overpaid for Kraft Foods in 2016, and the combined company’s balance sheet has paid for it ever since. Even with more than $15 billion in goodwill impairment in 2019, the company’s balance sheet remains debt-heavy and with minimal leeway to reinvest in its brands.
The silver lining here is that the COVID-19 pandemic has encouraged consumers to eat at home more often. This has boosted sales of pre-packaged, quick-prepared meals and snacks, which are core to Kraft Heinz’s operating model.
3. US Bancorp: yield of 3.77%
Longtime outfit American bank (USB 0.45%) is yet another rock-solid income security lurking in plain sight in Buffett’s portfolio. Its relatively high yield of 3.8% reflects its superior return on assets (ROA) among major bank stocks.
While most money banks ran into big trouble during the financial crisis seeking out riskier derivative investments, US Bancorp’s management team focused primarily on the bread and butter of banking: growth. loans and deposits. It’s by no means sexy, but it’s a proven way for banks to increase their profits and payouts in the long run.
What really sets US Bancorp apart is the company’s digital engagement. As of May 31, 2022, 82% of its active customers were doing digital banking. This includes 64% of total loan sales made online or through a mobile app, up from just 45% at the start of 2020. Online and mobile transactions are substantially cheaper for banks than face-to-face or phone interactions. This is just another reason why US Bancorp is an ROA beast among bank stocks.
4. Citigroup: 3.75% return
Not far behind US Bancorp in terms of performance is the monetary center giant Citigroup (VS 0.20%). Although Citigroup has endured its struggles over the past decade and change, it hasn’t hurt the company’s ability to easily top 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 no choice but to be aggressive with interest rates in order to keep inflation under control, bank stocks should see a healthy rise in net interest income earned on outstanding loans to floating rate. And to be clear, the country’s central bank does not appear to be ending its hawkish monetary policy anytime soon.
Citigroup should also benefit from the cyclical nature of the banking sector. Although bank stocks like Citi are likely to increase delinquencies and loan write-offs during periods of economic contraction and recession, the U.S. and global economy spends far more time expanding than contracting. Patience in banking usually pays off.
5. Paramount Global: 3.67% return
Another relatively new company generating considerable returns for the Oracle of Omaha is a media and entertainment company World Paramount (PARA 2.41%). Paramount’s nearly 3.7% yield is about two percentage points higher than the S&P 500 dividend yield.
The obvious catalyst for Paramount throughout this decade will be its streaming push. As consumers move away from traditional cable bundles and towards less expensive bolt-on streaming packages, Paramount+ has made huge gains. Even after pulling its services from Russia, global direct-to-consumer subscribers jumped to nearly 64 million. Paramount+ added 3.7 million net subscribers during the second quarter.
However, Paramount is also reaping the rewards of at least some moviegoers returning to the theater. Although cinema attendance has been declining since 2002, Top Gun: Maverick propelled the company’s motion picture entertainment segment to more than double revenue in the quarter ended June. If cinema continues to normalize closer to pre-pandemic levels, Paramount’s payout could increase even more over time.
6. Herringbone: 3.55% return
Last but not least, Big Oil is known for paying large dividends and the integrated oil stocks Chevron (CLC -0.26%) is no exception. The $5.68 per share that Chevron distributes each year represents a return of almost 3.6%. Add up to $10 billion in stock buybacks in 2022, and it’s easy to see why Warren Buffett has piled into this action.
Chances are Chevron, a dividend aristocrat, will have no trouble increasing its payouts for the foreseeable future thanks to disruptions in the global energy supply chain. Major energy companies have significantly reduced their capital investments during the COVID-19 pandemic. Add to that Russia’s invasion of Ukraine, and there’s the real possibility that supply constraints could drive up crude oil and natural gas prices for years to come.
Again, Chevron’s secret weapon may be its integrated operating structure. Although it makes its juiciest margins from drilling, the company also owns transmission pipelines, refineries and chemical plants.
Midstream pipelines are typically based on fixed fees or volume-based contracts, which is a fancy way of saying that they generate very predictable cash flows no matter how volatile energy commodity prices are. Meanwhile, downstream operations like refineries and chemical plants are benefiting from lower input costs (i.e. crude prices). In other words, Chevron is well covered in the oil and gas space.