Warren Buffett’s Best High-Yield Dividend Stocks

18: U.S. Bancorp (NYSE:USB)

Percent of Warren Buffett’s Portfolio: 2.8%
Dividend Yield: 2.5%   Forward P/E Ratio: 12.4x   (as of 4/15/16)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 5 years

U.S. Bancorp (NYSE:USB) was founded in 1863 and is the fifth biggest bank in the country as measured by assets. The company provides a full range of financial services, including lending, cash management, capital markets, and investment management services.

By business line, U.S. Bancorp generates 41% of its revenue from consumer and small business banking, 31% from payment services, 17% from whole banking and commercial real estate, and 11% from wealth management and securities services.

Overall, fee income accounted for 45% of total revenue in 2015. The company’s diversification makes it a more consistent and predictable business.

U.S. Bancorp has been one of Warren Buffett’s stock picks since before the financial crisis when he initiated a position in early 2007.

The company has a strong history of making high quality loans and remaining well capitalized relative to peers. As a matter of fact, U.S. Bancorp is the highest rated peer bank across all rating agencies when it comes to debt, providing it with funding and competitive advantages.

If Buffett owns the stock, it is safe to assume that USB’s culture is a conservative one that manages risk very carefully. This discipline shows up in USB’s profitability and efficiency metrics, which rank better than its peers.

Bank stocks look relatively cheap today because interest rates are expected to remain lower for longer. When rates are low, banks make less money on their lending operations.

Despite the tough environment for banks, USB’s loan portfolio has been growing at an annualized rate near 7% over the last decade.

The company’s loan book is also well-diversified and maintains little exposure to energy markets (1.2% of total exposure). Commercial loans are the company’s biggest lending category at 34% of average loans in 2015, followed by residential mortgages (27%) and commercial real estate (17%).

Warren Buffett owns U.S. Bancorp (NYSE:USB) because it is a high quality, conservatively managed business that has demonstrated an ability to achieve consistent growth. Over time, these types of companies should compound shareholders’ capital nicely.

19: M&T Bank Corporation (NYSE:MTB)

Percent of Warren Buffett’s Portfolio: 0.5%
Dividend Yield: 2.4%   Forward P/E Ratio: 13.8x   (as of 4/15/16)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 0 years

M&T Bank Corporation (NYSE:MTB) was established in 1856 and is one of America’s largest 20 commercial banks. Its 800+ domestic branches span across eight states mostly located in the eastern half of the U.S.

The company acquired Hudson City Bancorp in late 2015 for $5.2 billion, increasing its loan portfolio by nearly 30% while providing meaningful opportunities for cost savings and growth in adjacent markets.

The deal further improves M&T regulatory capital ratios, was immediately accretive to book value per share, and offers an attractive internal rate of return of about 18%.

M&T has been one of Berkshire Hathaway’s stock picks since Buffett bought preferred stock in the company back in 1991. His shares later converted into common stock about five years later.

M&T has a long history of conservative risk management practices. The company has enjoyed relatively low earnings volatility due to its careful credit underwriting and also benefits from the diversity of its operations, which include wealth and fiduciary units.

As a result, M&T has consistently outperformed its peers as measured by profitability, efficiency, and net charge-off ratios. The company has also grown its net operating earnings per share by 15% per year since 1983, steadily compounding its value.

Shareholders have also been rewarded over this time period, enjoying 13% annualized dividend growth since 1983 and an annual total return of 18.9% since 1980 – that’s the 24^th best return of all U.S.-based stocks that traded publicly since 1980.

Warren Buffett likes to own the best companies in a particular industry, and M&T Bank Corporation (NYSE:MTB) sure makes a strong case. The business is one of the safest banks that money can buy and has demonstrated an excellent ability to consistently grow earnings over time.

20: American Express Company (NYSE:AXP)

Percent of Warren Buffett’s Portfolio: 8.0%
Dividend Yield: 1.9%   Forward P/E Ratio: 11.9x   (as of 4/15/16)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 4 years

American Express Company (NYSE:AXP) was founded in 1850 and is a financial services company best known for its credit card and travel-related services used by consumers and businesses. In 2015, over $1 trillion was billed on American Express cards.

American Express is one of Warren Buffett’s oldest and most successful stock picks. Buffett first invested in American Express in the mid-1960s, and the company remains one of his largest positions today.

True to his value investor roots, Buffett first purchased shares of American Express in the wake of the infamous salad oil scandal, which caused the company to incur major liabilities.

Fortunately for Buffett, he realized that the event did not impact American Express’ long-term earnings power or franchise value and snapped up 5% of the company’s shares at a bargain price.

Buffett’s fascination with the business likely starts with its powerful brand and status symbol. American Express is consistently rated as one of the most valuable brands in the world, and its cards are used in over 180 countries.

The typical American Express cardholder spends significantly more than cardholders of the company’s competitors. As a result, American Express has been able to command superior discount rates with merchants (merchants benefit from higher sales and more loyal customers when they work with AXP) and offer more attractive rewards to its cardholders (AXP reinvests its higher discount revenue from merchants).

This creates a bit of a network effect and helps American Express continue acquiring new cardholders characterized by high creditworthiness and above-average spending.

While the competitive environment has intensified and new cardholder growth has become more challenging to come by, Warren Buffett’s massive unrealized gains on his shares of American Express Company (NYSE:AXP) will likely keep him in the stock for a long time to come (his tax bill will be enormous once he sells).