Warren Buffett’s Best High-Yield Dividend Stocks – May 2016 Update

13: Deere & Company (NYSE:DE)

Percent of Warren Buffett’s Portfolio: 1.4%
Dividend Yield: 2.9%   Forward P/E Ratio: 20.2x   (as of 5/16/16)
Sector: Industrials   Industry: Farm Machinery
Dividend Growth Streak: 12 years

Deere & Company (NYSE:DE) manufactures an assortment of heavy equipment primarily serving the agriculture and construction industries. Its major products include tractors, harvesters, corn pickers, construction equipment, earth moving equipment, and more.

Deere is yet another iconic American brand in Berkshire Hathaway’s portfolio. Warren Buffett began buying up shares of Deere during the third quarter of 2012.

Since then, Berkshire Hathaway’s stake in the company has increased to more than 7% of Deere’s total shares outstanding.

Buffett is no stranger to the agricultural industry and owns CTB, which sells products used in the hog and poultry industries. He is likely bullish on the ag economy over the very long term and, as a value investor, likes to increase his stake during periods of cyclical downturns like we are experiencing today.

While farm income has slumped with crop prices and reduced demand for Deere’s equipment, the company’s competitive advantages remain largely intact.

Deere owns the most robust distribution network in agricultural machinery, which allows it to service customers more quickly and cost-effectively than its rivals.

Farmers and construction workers alike depend on Deere’s multi-million dollar pieces of equipment to do their jobs, and downtime results in cost overruns. When they purchase through Deere, they know their machinery can be serviced quickly to keep it up and running.

Deere & Company (NYSE:DE) also invests heavily to offer the most innovative products in the industry and stay ahead of its competitors. As the world continues to need more food and invest in infrastructure over the next several decades, Deere will likely continue to grow with it.

14: Kinder Morgan Inc (NYSE:KMI)

Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 2.9%   Forward P/E Ratio: 25.4x   (as of 5/16/16)
Sector: Energy   Industry: Oil & Gas Production & Pipeline
Dividend Growth Streak: 0 years

Kinder Morgan Inc (NYSE:KMI) is the largest energy infrastructure company in North America. The company maintains over 80,000 miles of pipelines that primarily transport natural gas, crude oil, refined products (e.g. gasoline), and carbon dioxide.

Kinder Morgan also owns approximately 180 terminals that are used to store oil, chemicals, ethanol, and other commodities.

Kinder Morgan is one of Berkshire Hathaway’s most recent purchases. Berkshire Hathaway purchased a stake in the company during the fourth quarter of 2015 after the stock had sold off by more than 50% during the year and slashed its dividend.

Kinder Morgan’s poor performance was driven by lower energy prices and unfavorable contract developments.

What does Buffett see in Kinder Morgan?

Most likely, Warren Buffett bought Kinder Morgan because he was attracted to the company’s hard-to-replicate assets, which became available at an attractive price for long-term investors.

There are only so many pipelines and terminals that are needed to handle North America’s energy infrastructure needs, and Kinder Morgan happens to own many of the most important ones.

The company’s natural gas pipeline network is the largest in the country and connects to virtually every important U.S. natural gas resource play. Energy producers and consumers will likely need Kinder Morgan’s services for decades to come. Its assets are mission-critical to North America’s energy needs.

While the fallout in oil and gas prices impaired Kinder Morgan’s ability to continue investing for growth and paying its high-yield dividend, the nature of the pipeline business is reliable in most environments.

Most of the company’s pipeline projects are secured by long-term contracts and offer attractive fee-based returns that are not directly exposed to commodity prices.

By purchasing Kinder Morgan Inc (NYSE:KMI) during a cyclical downturn, Berkshire Hathaway gains exposure to a unique and valuable set of assets that should benefit over the long haul as North American energy production rises.

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