Analyzing Warren Buffett’s Top High-Yield Dividend Stocks
We analyzed each of Warren Buffett’s stock picks that pay a dividend, starting with his highest-yielding dividend stocks.
For each of Warren Buffett’s investments, we review what the business does and the potential reasons behind Berkshire Hathaway’s attraction to the company.
Our analysis is updated quarterly as new information about Berkshire Hathaway’s portfolio is released. The holdings below are sorted by dividend yield.
1: AT&T Inc. (NYSE:T)
Percent of Warren Buffett’s Portfolio: 1.2%
Dividend Yield: 5.0% Forward P/E Ratio: 13.4x (as of 4/15/16)
Sector: Telecom Industry: Diversified Communications Services
Dividend Growth Streak: 32 years
AT&T Inc. (NYSE:T) provides internet, voice, and pay-TV services to millions of customers across the United States and 11 Latin American countries. The company acquired DirecTV in mid-2015 in an effort to expand its service offerings and sell more attractive bundles of services to customers.
DirecTV added over 20 million customers to AT&T’s TV service (U-Verse), which had fewer than 6 million customers.
Warren Buffett acquired his stake in AT&T during the third quarter of 2015 as a result of AT&T’s acquisition of DirecTV. Buffett had owned DirecTV prior to the acquisition (his first purchase was in 2011), so his shares converted into AT&T stock once the deal closed because the acquisition was a stock and cash transaction.
Berkshire Hathaway sold part of its stake in AT&T during the fourth quarter of 2015, so it looks like Buffett might not plan to stick around in AT&T Inc. (NYSE:T).
Buffett probably liked DirecTV because it was the largest satellite TV company in the country and the second biggest pay-TV provider behind only Comcast. Providing pay-TV service is extremely costly – DirecTV’s service was made possible by its high-powered satellites, which cost a fortune.
Since DirecTV was the biggest player in the industry, it could spread its high fixed costs across a much larger subscriber base than its peers, enabling it to offer the most cost-effective service and dominate the market.
Pay-TV service is also quite sticky given the limited number of competitors and high barriers to entry. Once a consumer begins a service, he or she is likely to continue making monthly payments long into the future, providing excellent cash flow for the provider.
Buffett loves predictable businesses with strong moats and consistent cash flow generation, and DirecTV certainly fit his criteria.
Follow At&T Inc. (NYSE:T)
Follow At&T Inc. (NYSE:T)
2: General Motors Company (NYSE:GM)
Percent of Warren Buffett’s Portfolio: 1.3%
Dividend Yield: 4.9% Forward P/E Ratio: 5.6x (as of 4/15/16)
Sector: Consumer Discretionary Industry: Domestic Auto Manufacturers
Dividend Growth Streak: 2 years
General Motors Company (NYSE:GM) is one of biggest manufacturers of cars and trucks with nearly 10 million retail vehicle sales per year. Its product mix is balanced between cars (37% of sales), trucks (38%), and crossovers (25%).
The company owns the iconic North American brands Buick, Cadillac, Chevrolet, and GMC. Sales in North America account for about 55% of GM’s sales.
Overseas, General Motors sells its vehicles under the Holden, Opel, and Vauxhall brands and conducts most of its business in Europe (19% of sales) and South America (15%). However, China is GM’s second largest market and is number one by volume.
Berkshire Hathaway bought its initial stake in General Motors in early 2012. Warren Buffett is very familiar with the auto industry and has stakes in a handful of auto dealerships, so his involvement with GM isn’t overly surprising.
Buffett likes companies that have dominant shares of their markets, and GM is no exception. General Motors has the largest market share in North America and South America and is the second largest player in the Asia, Middle East, and Africa region.
Buffett probably sees substantial value in many of the company’s brands as well. From cheeseburgers to Chevrolet, Warren Buffett loves American icons.
As a value investor, Buffett has to like General Motors’ valuation, too. The company trades at a single-digit earnings multiple and has a dividend yield near 5%.
The stock looks cheap because investors are worried about the auto cycle rolling over, and many still have a sour taste in their mouths from General Motors’ bankruptcy and subsequent government bailout during the financial crisis.
However, the “new” GM is much stronger than its predecessor and has substantially improved its earnings power and financial health – the company has roughly $25 billion in cash on the balance sheet and generated over $4 billion in free cash flow last fiscal year.
Buffett’s favorite holding period is “forever,” and he probably sees plenty of room for General Motors to continue growing its earnings over time as it continues cutting costs and making investments in higher-margin areas.
As a matter of fact, GM’s management team hopes to improve pretax profit margins from under 7% in recent years to about 10% over the next five years. Management also believes global auto sales will rise from 85 million to 130 million by 2030, which would certainly boost GM’s earnigns.
While the auto industry is certainly cyclical, GM appears well-positioned to get through almost any environment and remain relevant for a long time to come.
We own shares of General Motors Company (NYSE:GM) in our Conservative Retirees dividend portfolio, and our initial thesis on the company can be read by clicking here.
