In this piece, we will take a look at the 15 best dividend stocks to buy according to Warren Buffett.
The US Federal Reserve hiking interest rates to 5.25% has been the catalyst behind inflationary pressures plunging from highs of 9.1% to about 3.1% as of November. While there were concerns that the high-interest rates would plunge the economy into recession, that has not been the case. A solid labor market and solid economic data depict the economy’s resilience. However, the high-interest rate environment threatens to disrupt dividend-paying stock returns.
The high-interest rates in play, following the Fed hikes, translate to increased interest payments whenever companies borrow or raise capital through bonds, loans and convertible debt. The net result is an increase in interest expense that reduces companies’ earnings used to pay dividends.
When earnings decline due to extra expenses attributed to higher interest rates, one or two things might happen. The stock value might fall to adjust for the reduction in earnings. Secondly, the valuation multiples might rise as investors are forced to pay more for fewer future earnings. While higher valuation might help prop the stock’s price in the short term, it may lead to higher volatility.
Professional investors sometimes turn to defensive dividend-paying stocks in a high-interest rate environment where earnings are constantly under pressure. Warren Buffett, the Oracle of Omaha, always focuses on companies with solid fundamentals and competitive advantages. Such companies are the only ones capable of sustaining and increasing their dividends regardless of the prevailing macroeconomics.
While most investors focus on stocks offering high dividend yields, Buffett advocates for stocks with moderate yields from strong and prosperous companies. As of the end of the second quarter, most of the stocks in Buffett’s portfolio were companies with a solid and long track record of increasing and paying dividends.
According to the legendary investor, the value of any dividend stock depends on the company’s ability to generate earnings today and tomorrow. To identify such a company, investors ought to investigate the company’s dividend history. It’s the only way to identify companies with a solid track record of consistently increasing earnings, allowing them to pay dividends over at least five years.
It is a strategy that the legendary investor has perfected over the years going by his investments in The Coca-Cola Company (NYSE:KO). Berkshire Hathaway, the holding firm that Buffett uses to invest in the equity markets, has seen its share of earnings through dividends in the beverage giant grow from $75 million in 1994 to $704 million as of 2022. American Express Company (NYSE:AXP) has also proved to be a successful investment for Buffett, with dividend returns having grown from $41 million in 1995 to $302 million as of last year.
Beyond earnings and profits that companies use to pay dividends, Buffett advocates for paying close watch to companies’ revenues and cash flow growth rates. Such metrics provide valuable information on how a company operates and whether it can sustain its dividend program.
In some cases, a company’s earnings used in paying dividends might be higher due to increased cuts in expenses rather than underlying revenue growth. However, if revenues are increasing, it means the company’s core business is growing steadily to generate much-needed earnings for dividends.
Cash flow is another critical metric that Buffett pays close watch to as it represents the amount of money available to finance various operations. Any company with negative cash flow cannot continue operating for long and won’t be able to pay any dividends.
The best dividend stocks have consistently proven their worth regardless of the prevailing market conditions. The stocks have played a significant role in affirming the S&P 500 returns over the years. The S&P 500 rose by about 777% between 1993 and the end of 2022. Including dividends, the index rose by about 1400%. In this case, dividends accounted for about 20% of the market’s total return.
According to Buffett, investors should strive to invest in companies with a strong dividend history rather than investing in the overall stock market. Likewise, he constantly advocates for value stocks priced lower than their intrinsic value. While growth stocks have yielded a return of 626,000% since 1926, value stocks have generated a total return of 1,344,600% over the same period.
Amid the high inflation period in 2022, value stocks remained resilient, only going down by 7%. In contrast, growth stocks that some investors turn to because of their high dividend yield went down by about 28%.
Value stocks have not performed well as growth stocks in 2023, as depicted by the Russell 3000 Growth Index, beating its counterpart by 22%. Nevertheless, the stocks are expected to bounce back as their performance remains better in the long run.
Value stocks trading at discounted valuations have also proved their worth regarding dividend payouts. Given that the companies grow gradually and remain resilient amid challenging macroeconomics, they also tend to increase their dividend payouts gradually. Chevron is one such company in Buffett’s portfolio that has increased its dividends for 36 years.
Our Methodology
Buffett’s skillful stock-picking for passive income is evident as Berkshire Hathaway is anticipated to accumulate over $6 billion in dividend income in the upcoming year. Our examination of Berkshire Hathaway’s 13F filings led us to identify top-performing stocks with consistent dividend payouts. The selected stocks are part of Berkshire Hathaway’s Q3 2023 13F portfolio, and we specifically focused on those companies that regularly distribute dividends to their shareholders. From this list, we narrowed down the list to the 15 stocks with the highest number of hedge fund investors, as tracked by Insider Monkey, by the end of Q3 2023.
Best Dividend Stocks to Buy According to Warren Buffett
15. The Kraft Heinz Company (NASDAQ:KHC)
Number of Hedge Fund Holders: 40
Pittsburgh, Pennsylvania-based The Kraft Heinz Company (NASDAQ:KHC) is a company that produces and markets food and beverage products. According to Warren Buffett, it is one of the best dividend stocks to buy, as it comes with a lucrative 4.38% yield.
The Kraft Heinz Company has been paying dividends since 2015 and produces a quarterly dividend of about $0.40 per share. It is one of the most significant holdings in Berkshire Hathaway and accounts for one of the largest sums of dividend cash at about $524 million.
In the third quarter of the current year, 40 out of the 910 hedge funds scrutinized by Insider Monkey retained a position in The Kraft Heinz Company. The predominant hedge fund stakeholder in The Kraft Heinz Company is Berkshire Hathaway, under the leadership of Warren Buffett, holding a significant investment valued at $10.9 billion.
14. The Kroger Co. (NYSE:KR)
Number of Hedge Fund Holders: 41
Cincinnati, Ohio-based The Kroger Co. (NYSE:KR) is a consumer defensive investment play in Berkshire Hathaway’s portfolio that operates a food and drug retailer in the United States. The Kroger Co. operates drug stores, multi-department stores, marketplace stores, and price-impact warehouses.
The Kroger Co. has paid dividends for 34 years. It boasts of a dividend growth streak of 17 years that affirms why it is one of the best dividend stocks to buy, according to Warren Buffett. The Kroger Co. has a yield of 2.57%, having declared a quarterly dividend of $0.29 a share in September.
As of the close of the third quarter in 2023, Insider Monkey’s data revealed that 41 hedge funds were holding investments in The Kroger Co., reflecting a slight reduction from the 43 in the preceding quarter.
In its Q3 2023 investor letter, Oakmark Funds featured insights on The Kroger Co.. The firm expressed the following perspective:
“The Kroger Co. is the second-largest grocery retailer in America behind only Walmart. Although the grocery industry is highly competitive, Kroger’s scale advantages allow it to offer a more compelling value proposition than smaller peers and earn higher returns on capital. In recent years, the market has assigned Kroger a lower multiple due to concerns that e-commerce would disrupt traditional brick-and-mortar grocery. However, we believe the company’s performance through the pandemic highlighted that its store footprint, distribution infrastructure, technology investments and strong brand all position the company well for a world with higher online grocery adoption. The stock trades for just 10x our estimate of next year’s EPS, which we believe is attractive given Kroger’s competitive positioning and earnings growth outlook. The pending merger with Albertsons has the potential to drive accelerated earnings growth and further scale advantages. If the merger is not approved, the company will have the capacity to return approximately 25% of its market cap to shareholders.”
13. HP Inc. (NYSE:HPQ)
Number of Hedge Fund Holders: 44
While Buffett is not fond of technology stocks, HP Inc. (NYSE:HPQ) remains one of his top picks as Berkshire Hathaway owns stakes worth $2.6 billion. HP Inc. has made a name for itself by providing personal computing and other access devices, imaging and printing products, related technologies, solutions, and services.
HP Inc. has raised its dividend offering for 12 consecutive years, affirming why it is one of the best dividend stocks to buy, according to Warren Buffett. Recently, it hiked its dividend offering by 5% to $0.28 a share, amounting to a yield of 3.64%. The company has paid dividends for 21 years.
Out of the 910 hedge funds that Insider Monkey tracks, 44 of them had stakes in the firm in Q3 2023. The biggest hedge fund shareholder of HP Inc. was Berkshire Hathaway, which is owned by Warren Buffett. They had a stake worth $2.6 billion.
12. Aon plc (NYSE:AON)
Number of Hedge Fund Holders: 48
Aon plc (NYSE: AON) is a global professional services firm offering advice and solutions to clients worldwide in the areas of risk, retirement, and health. Aon plc (NYSE:AON) offers commercial risk solutions, including retail brokerage, specialty solutions, and global risk consulting and affinity programs. It also provides treaty and facultative reinsurance, as well as insurance-linked securities.
Berkshire Hathaway has held stakes in the financial services company since 2021 and benefited from a 10% dividend hike in April. Aon plc (NYSE:AON) currently offers a quarterly dividend of $0.62 a share with an annual dividend yield of 0.79%.
Out of the 910 hedge funds that Insider Monkey tracks, 41 of them had stakes in Aon plc (NYSE:AON) in Q3 2023. In the same quarter, the largest shareholder of Aon plc (NYSE:AON) was Berkshire Hathaway, which Warren Buffett owns. They had shares worth $1.3 billion.
11. Capital One Financial Corporation (NYSE:COF)
Number of Hedge Fund Investors: 49
Capital One Financial Corporation (NYSE:COF) offers various financial products and services. Capital One Financial Corporation accepts checking accounts, money market deposits, and negotiable orders of withdrawals, savings, and time deposits.
Capital One Financial Corporation is one of the dividend aristocrats in Berkshire Hathaway’s portfolio, having paid dividends for 26 years. Capital One Financial Corporation pays a quarterly dividend of $0.60 a share with a yield of 1.82%.
Out of the 910 hedge funds that Insider Monkey tracks, 49 of them had stakes in the company by the end of Q3 this year. The largest shareholder of Capital One Financial Corporation in our database was Harris Associates, which Natixis Global Asset Management owns. They had a stake worth $1.8 billion.
10. Coca-Cola Co (NYSE:KO)
Number of Hedge Fund Holders: 57
Coca-Cola Company has always been one of Buffett’s top dividend plays, affirming his focus on companies that grow yields gradually. The consumer-facing company is best known for manufacturing and selling some of the most sought-after non-alcoholic beverages in the world.
The strong demand for Coca-Cola Company’s sparkling soft drinks has seen it grow revenues and free cash flow, consequently paying dividends for 59 years. Coca-Cola Company is a stock that Buffett has owned the longest and currently offers a quarterly dividend of $0.46 per share, a yield of 3.14%.
At the end of Q3, 57 hedge funds out of the 910 funds tracked by Insider Monkey had stakes in the company. Warren Buffett’s Berkshire Hathaway was a significant shareholder of Coca-Cola Company, which maintained a significant stake worth $22.39 billion.
Here is what Hayden Capital said about The Coca-Cola Company in its third 2023 investor letter:
“It’s not just emerging markets either, where one could argue a “scarcity premium” given fewer quality public companies. Even in the US, The Coca-Cola Company trades at ~30x P/E despite having the same earnings as 10 years ago.
Both of these companies actually have lower revenues than 10 – 15 years ago too, indicating that their profit growth is mostly from margin expansion. This can only last for so long before there’s no more excess expenses left to cut.
I find it ironic that all these companies trade as “bond-equivalents” in the minds of investors – even commanding lower yields than US treasuries, the safest security in the world. But it’s clear that their businesses are not nearly as safe. Coca-Cola is facing disruption risk from consumers shifting to new, heathier beverage brands.
But these companies are ~35% more expensive than US Treasuries, despite the heightened risk. On a risk-adjusted basis, one could argue the implied premium is even higher.”
Perhaps the explanation is simply the price volatility difference between these stocks and treasuries over the last two years. For example, 10-year Treasury bonds are down ~-20% since the beginning of 2022. By comparison, KO and PG are remarkably down only -4 – 6% over that time frame.”
9. Moody’s Corporation (NYSE:MCO)
Number of Hedge Fund Investors: 58
Moody’s Corporation is a financial services company that publishes credit ratings and provides assessment services on various debt obligation programs and facilities. Moody’s Corporation remains one of the best dividend stocks to buy, according to Warren Buffet, as it has been raising its offering for the past 13 years.
In the third quarter, Moody’s Corporation recorded an 18% increase in revenues to $1.5 billion, with its free cash flow hitting over $1.4 billion. The company has been paying dividends for the past 27 years, with its yield at 0.79%.
In the September quarter of 2023, Insider Monkey analyzed the investments of 910 hedge funds and identified 58 of them that had holdings in Moody’s Corporation. The leading shareholder among these hedge funds was Berkshire Hathaway, headed by Warren Buffett, holding a substantial stake valued at $7.7 billion.
8. Chevron Corp (NYSE:CVX)
Number of Hedge Funds: 72
Chevron Corp (NYSE:CVX) has always been one of Buffett’s top investment players in the energy sector. The company is engaged in integrated energy and chemicals operations, whereby it explores, develops, produces, and transports crude oil and liquefied natural gas.
According to Warren Buffet, Chevron Corp is one of the best dividend stocks to buy, boasting a 36-year streak of consistent dividend growth. Chevron Corp currently pays a quarterly dividend of $1.51 a share with a yield of 3.98%
Out of 910 hedge funds that Insider Monkey tracks, 72 had Chevron Corp shares. The largest shareholder of Chevron Corp was Berkshire Hathaway, which is owned by Warren Buffett. The hedge fund held shares worth $18.6 billion of Chevron Corp.
7. American Express Company (NYSE:AXP)
Number of Hedge Fund Holders: 74
American Express Company is one of the credit card companies in the US that offers credit payment card products and related services. American Express Company’s products and services include payment and financing, network services, accounts payable, and expense management products and services.
American Express Company boasts of a 34-year record of paying dividends, one of the reasons Buffett owns the stock. The legendary investor has collected about $360 million yearly from American Express Company through dividend payments. A yield of 1.21% comes on the company targeting high-net-worth individuals and other credit card companies from where it generates a good chunk of its earnings.
By the end of Q3 2023, 74 hedge funds tracked by Insider Monkey owned stakes worth over $25.6 billion in American Express Company. This was a rise from the previous quarter when 73 hedge funds had shares of the company. Among these hedge funds, Berkshire Hathaway had the biggest stake in Q3.
6. Occidental Petroleum Corporation (NYSE:OXY)
Number of Hedge Funds: 75
Occidental Petroleum Corporation (NYSE:OXY) is another energy investment play in Berkshire Hathaway Portfolio that Buffett turns to for dividends. Occidental Petroleum Corporation generates a good chunk of its revenue from exploring and developing oil and gas properties. It develops and produces oil and condensate natural gas liquids and natural gas.
While Buffett has held stakes in Occidental Petroleum Corporation since the first quarter of 2022, the company has been paying dividends since 1989. Occidental Petroleum Corporation currently pays a quarterly dividend of $0.18 with a yield of 1.19%.
Berkshire Hathaway, led by Warren Buffett, holds the most substantial share in Occidental Petroleum Corporation with a stake valued at $14.5 billion. As of the end of the third quarter in 2023, 75 hedge funds disclosed their ownership of stakes in Occidental Petroleum Corporation, up from 73 in the previous quarter.
5. Citigroup Inc. (NYSE:C)
Number of Hedge Fund Holders: 79
Citigroup Inc. (NYSE:C) is the 12th largest holding in Berkshire Hathaway’s portfolio and one of the best dividend stocks to buy, according to Warren Buffett. Citigroup Inc. generates a large amount of revenue from providing financial products and services to consumers, corporations, and government institutions.
While Citigroup Inc. has been paying dividends since 1990, its quarterly offering stands at $0.53 a share with a yield of 4.25%, one of the highest in Buffett’s portfolios. In the third quarter alone, the company returned 15 billion through dividends and share repurchases to shareholders.
Citigroup Inc. had 79 hedge funds in Insider Monkey’s database as shareholders at the end of the third quarter of 2023. This was an increase from the previous quarter when 75 hedge funds held stakes in the company. The value of these stakes was almost $7 billion.
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4. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 88
Bank of America Corporation (NYSE:BAC) is Berkshire Hathaway’s second-largest holding and one of the best dividend stocks to buy, according to Buffett. The legendary investor has held stakes in the financial services company since 2017 and is impressed by its yield, which currently stands at 2.86%.
While Bank of America Corporation pays a quarterly dividend of $0.24 a share, it has a 24-year run of paying regular dividends to shareholders. The $28 billion worth of shares that Berkshire Hathaway holds generates about $990 million in dividends.
The value of the stakes that 88 hedge funds in Insider Monkey’s database held in Bank of America Corporation was more than $31.3 billion at the end of the third quarter of 2023. This was a slight decrease from the previous quarter when 90 hedge funds owned shares of the company.
Smead Capital Management, an investment management company, mentioned Bank of America Corporation in its Q3 2023 investor letter. Here is what the fund said:
“Through the first nine months of the year, we had a gain of 2.10%. The S&P 500 had a gain of 13.07% and the Russell 1000 Value had a gain of 1.79%. The stock market realized markedly higher riskless US Treasury interest rates had their effect on the stock market as it began to reassert what Warren Buffett calls the “gravitational pull” on price-to-earnings ratios (P/E).
On the downside, Target (TGT), Bank of America Corporation and Pfizer (PFE) detracted the most in the first nine months of the year. Inverted yield curves are historically lousy for the banks, so the weak performance for BAC is no surprise.”
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3. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 134
Apple Inc. (NASDAQ:AAPL) is a dividend aristocrat stock that has rewarded investors with passive income for about 36 years. The impressive track record stems from the company’s resilient core business that entails manufacturing and selling some of the most sought-after smartphones, MacBooks, tablets, and wearables. Apple Inc. services unit, which includes the Apple Store, Apple Pay, and cloud services, also generates significant revenue to support dividend and buyback programs.
Apple Inc. is the largest holding in Berkshire Hathaway’s portfolio, accounting for 50%. Over the past decade, its dividend payout has increased by about 9%. It currently pays a quarterly dividend of $0.24 on a yield of about 0.49%.
The number of hedge funds in Insider Monkey’s database that owned shares of Apple Inc. dropped slightly from 135 to 134 in the third quarter of 2023. The value of their stakes also decreased from $194 billion to $179 billion.
Here is what Baron Funds said about Apple Inc. in its Q3 2023 investor letter:
“After a strong start to the year, shares of Apple Inc. partially retraced their gains this quarter. Mixed second calendar quarter financial results, with iPhone, iPad, and Wearables revenue coming in just shy of consensus expectations, coupled with elevated investor concerns about the macro economy and potential weakness in consumer spending later this year, pressured shares. Despite these quarterly fluctuations in product sales, we are encouraged by several long-term trends, including: (1) revenue from higher-margin services like the App Store, iCloud, and Apple Pay, which are growing faster than the overall business, driving better revenue visibility and higher free-cash-flow (FCF) margins; (2) continued gains in global market share in smartphones, wearables, and other hardware categories; and (3) consistent returns of capital to shareholders via share repurchases and dividends. On top of these trends in the core business, Apple is thoughtfully investing in new categories like augmented reality, search, financial services, and streaming media content. We took advantage of weakness in the quarter to add to our position in Apple.”
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2. Mastercard Incorporated (NYSE:MA)
Number of Hedge Fund Holders: 140
Mastercard Incorporated (NYSE:MA) is a global financial technology company offering a payment processing network. Mastercard Incorporated oversees payment transaction processing, including authorization, clearing, settlement, and provides additional payment-related products and services.
While Mastercard Incorporated has paid dividends for about 15 years, its dividend growth streak stands at 11 years. The company is fresh from declaring a 15% increase in quarterly dividend to $0.66 a share at the back of a yield of 0.62%.
Out of the 910 hedge funds that Insider Monkey tracks, 140 of them had stakes in the firm in Q3 2023. The biggest hedge fund stakeholder of Mastercard Incorporated was Akre Capital Management, which Charles Akre owns. They had a stake worth $2.3 billion.
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1. Visa Inc. (NYSE:V)
Number of Hedge Fund Holders: 167
Visa Inc. (NYSE:V) functions as a payment technology company. Visa Inc. also provides credit, debit, and prepaid card products.
Visa Inc. stands out as one of the best dividend stocks, having increased its offering by 15% in October to $0.52 a share, marking the 13th consecutive year of dividend growth. Visa Inc.’s yield stands at 0.80%.
By the conclusion of the third quarter in 2023, Insider Monkey’s database indicated that 167 hedge funds retained stakes in Visa Inc., with a combined value of $24.4 billion. This marked a slight decrease from the 171 hedge funds in the preceding quarter, holding stakes valued at $24.9 billion.
In its Q3 2023 investor letter, Ensemble Capital Management featured Visa Inc. among the highlighted stocks. The fund provided the following insights:
“Mastercard is a company that pretty much everyone has heard of. In fact, when we meet with Ensemble’s clients, we occasionally tell them that we’re nearly certain that they are carrying a Mastercard in their wallet or purse as we speak, and if not, they are carrying a Visa Inc.. Most people carry both.
People carry Mastercard and Visa because they are accepted nearly everywhere in developed markets. And they are accepted in most emerging economies, at least at locations where higher income people spend money. As a shopper you can show up at a bodega in Peru, a high end hotel in Tokyo, a truck stop in Alabama, or an ice cream cart in Milan, show them a piece of plastic and they’ll let you walk away with goods and services without any worry that they aren’t going to get paid…” (Click here to read the full text)
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This article is originally published at Insider Monkey.
