Billionaire Warren Buffett’s Top Dividend Picks

Dividend stocks are an important part of a value investor’s portfolio, because they represent quality companies with stable cash flow and reflect the management’s commitment to return capital to shareholders. Of course, dividends are not the only thing defining a quality company. Companies like Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), or even Warren Buffett‘s Berkshire Hathaway Inc. (NYSE:BRK.A) don’t pay a dividend and are unlikely to start any time soon, because they prefer to reinvest their profits and reward shareholders through growth. Nonetheless, Warren Buffett, who is one of the best value investors of our time, holds a lot of high-quality stocks, and, yes, they do pay a dividend. In fact, out of 46 holdings in Berkshire Hathaway’s last 13F filing, only 13 companies don’t pay a dividend and 33 stocks have a dividend yield above 1%. Moreover, most of his top holdings are great dividend stocks that should definitely be considered as part of any portfolio looking for long-term returns, such as Apple Inc (NASDAQ:AAPL), Wells Fargo & Co. (NYSE:WFC), Kraft Heinz Co (NASDAQ:KHC), The Coca-Cola Co (NYSE:KO), and U.S. Bancorp (NYSE:USB).

Because Warren Buffett is a great stock picker, a lot of people are trying to imitate him, which is not always a good idea. Buffett has been building his portfolio for decades and despite the changes that the world went through, he sticks with his conservative approach and avoids some potentially great companies, especially in the tech space. He also makes mistakes just like the next man and he is not afraid to admit it. Several years ago, Berkshire bought a stake in UK supermarket giant Tesco, which ultimately resulted in a loss of several hundred millions. While for Buffett it might be not a big deal, for smaller investors that followed him the consequences might have been more disastrous. Nevertheless, for long-term returns and dividend investing it’s a good idea to start picking stocks by looking at some of the holdings in Berkshire Hathaway’s equity portfolio.

Smaller investors that don’t have a lot of capital, might be better off looking at small-cap companies to build a more diversified portfolio. We have developed a strategy that identifies the best small-cap stocks to invest in based on the overall hedge fund sentiment. The strategy focuses on best-performing hedge funds and selects the stocks that they are collectively bullish on. Between February 16 and May 16, our flagship strategy returned 6.9% and outperformed the S&P 500 ETF (SPY) by 6.8 percentage points. Since it was launched in May 2014, the strategy gained 90.7%, beating the SPY by almost 36 percentage points. The stock picks from our strategy are shared in our quarterly premium newsletters, which you can access by accessing this link.

Going back to Warren Buffett’s top dividend stocks, we have selected mostly companies whose shares have yields above the S&P 500 average of 1.79%. The only exception is Apple Inc (NASDAQ:AAPL), which we included despite the dividend yield of 1.52%, because it has a huge free cash flow that makes its dividend very safe and the management has shown for years that it is committed to return more capital to shareholders, which is why it should be considered as a dividend growth stock.

Apple Inc (NASDAQ:AAPL) has become a star of Berkshire Hathaway’s equity portfolio. Since the stock was added in the first quarter of 2016, the fund has been consistently upping its stake in the iPhone maker, currently having a $40.19 billion stake that contains 239.57 million shares (up by 44% on the quarter). Apple Inc (NASDAQ:AAPL) has a free cash flow of around $54 billion, but it pays just 26% of it as dividends, as noted by Longbow Research in a note in April. The average among large-cap tech companies if 43%, which suggests that Apple could double its dividend easily and just match its peers. In addition, Apple Inc (NASDAQ:AAPL) is trading at just 13 times its forward earnings, which makes it undervalued, so it’s another reason why dividend investors should consider adding Apple Inc (NASDAQ:AAPL) to their portfolios.

Then there’s Wells Fargo & Co. (NYSE:WFC), in which Berkshire trimmed its stake by around 1.72 million shares to 456.51 million shares valued at $23.93 billion. Wells Fargo & Co. (NYSE:WFC)’s dividend yield of 2.85% is one of the largest among US-based banks. In addition, Wells Fargo & Co. (NYSE:WFC) has had a number of positive industry catalysts. The Fed has just raised the federal funds rate to 1.75% – 2% and there are two more hikes expected this year, which should provide a nice tailwind for banking stocks in addition to lower taxes. The rollback of the Dodd Frank act is bringing a number of benefits for the industry and there are further changes in regulations that might ease the burden of stress tests for banks. Stress tests determine how much capital banks are required to hold and how much they can give away to shareholders in form of dividend and stock buybacks. Since the beginning of the year, Wells Fargo & Co. (NYSE:WFC)’s shares have lost 10% as the bank is still recovering from the scandal related to its customer practices. Earlier this year, the Federal Reserve has capped the size of Wells Fargo & Co. (NYSE:WFC)’s assets until it addresses the issues and the bank is estimating that its assets will likely remain capped until the beginning of 2019. Last month, Wells Fargo & Co. (NYSE:WFC) launched a marketing campaign in an attempt to win back the trust of its customers.

Among Warren Buffett’s top holdings, Kraft Heinz Co (NASDAQ:KHC) has the largest dividend yield, 4.16%. Earlier this year, Dividend Channel has named Kraft Heinz Co (NASDAQ:KHC) the top dividend stock of the Nasdaq 100, pointing out company’s profitability. Kraft Heinz Co (NASDAQ:KHC) has been recently involved in some M&A speculation following the departure of Campbell Soup Company (NYSE:CPB) CEO Denise Morrison. Campbell Soup has been struggling with weak sales and it might sells some brands and Kraft Heinz Co (NASDAQ:KHC) might be a potential buyer. Moreover, the decline of the stock following disappointing results could spark the interest of Kraft Heinz Co (NASDAQ:KHC) to acquire the entire company. At the end of March Berkshire Hathaway held 325.63 million shares of Kraft Heinz Co (NASDAQ:KHC) valued at $20.28 billion.

In The Coca-Cola Co (NYSE:KO), Berkshire owns 400 million shares valued at $17.14 billion. The Coca-Cola Co (NYSE:KO)’s stock has a dividend yield of 3.40% and the company has been increasing its dividend each year for at least 50 years which makes it part of the Dividend Kings list. The Coca-Cola Co (NYSE:KO) has been struggling with weak sales amid a stronger dollar and changes in consumer tastes, but the company is working on turning things around by implementing a number of plans. Most recently, The Coca-Cola Co (NYSE:KO) has been focusing on lower-calorie beverages and smaller packages for soda drinks and some analysts expect positive changes from these moves as soon as next year.

During the first quarter, Berkshire Hathaway inched up its stake in U.S. Bancorp (NYSE:USB) by 4% to 90.85 million shares worth $4.59 billion. U.S. Bancorp (NYSE:USB) has a dividend yield of 2.31%. Similar to Wells Fargo & Co. (NYSE:WFC) has tailwinds in the form of regulatory relief, tax cuts and higher interest rates. For the last quarter, U.S. Bancorp (NYSE:USB) reported EPS of $0.96 per share and revenue of $5.47 billion, up by 3.8% on the year. Compared to analysts’ estimates, U.S. Bancorp (NYSE:USB)’s EPS was $0.01 higher than expected, but it missed the consensus revenue estimate by around $60 million.

Disclosure: none