Buffett’s Top Dividend Stock Will Surprise You

If you look down the list of dividend stocks that Warren Buffett’s Berkshire Hathaway owns, the highest yielding one will surprise you and it’s not apparent at first glance.

A cursory examination of his portfolio would suggest that the highest paying dividend stock is Citigroup, which pays a 4.3% yield and represents a 0.7% stake.

But is there more to his portfolio than meets the eye? We reveal a hidden truth that few know about.

Key Points

• Buffett favors owning dividend stocks that typically are undervalued, but notably most of his positions yield under 5%.
• On one of his favorite stocks, Buffett’s annual yield is closer to 50%, a remarkable feat made possible by holding for decades.
• Beyond solid dividends, Buffett finds stocks with wide moats trading at reasonable earnings multiples that are undervalued.

Buffett’s Top 5

The next highest yielding stock in Buffett’s portfolio is Kraft Heinz, which the Oracle of Omaha readily admits he overpaid for back in the day. Now, though, it offers a 4.2% yield and, better yet, has 29.2% upside to fair value according to a discounted cash flow analysis. That’s not entirely a surprise given that it’s trading at just 15x earnings.

Yielding an almost identical amount is Chevron, though it seems the energy stock has fallen out of favor with the Sage of Omaha because it ranked as one of his biggest sells in Berkshire’s most recent 13F filing report. Analysts have lost their enthusiasm for Chevron too, it seems, with a handful of them downgrading their forecasts for the upcoming quarter.

In the 4% plus yielding category the only stocks in his portfolio are Citigroup, Kraft Heinz and Chevron. Once you get to the 3% range, a host of other stocks are featured, including Ally and HP that pay 3.7%, Diageo offering 3.3%, and Jefferies Financial Group paying 3.2%. Rounding out the 3-4% yielding stocks is Coca Cola, at least at first glance.

Coca Cola’s True Dividend Yield

While Coca Cola appears to yield 3.1%, that is the dividend new buyers would receive if purchasing the stock today. Of course, Buffett bought his stake in the drinks maker decades ago and so the actual yield he earns annually on his original principal is astonishingly closer to 50%.

The takeaway for new investors is clear. When you find a company that increases its dividend annually, as Coke has for 61 years straight, stick with it, and don’t let the swings of economic boom and bust cycles toss you from the rollercoaster ride.

By holding Coke as long as Buffett has, his annual return on his original investment in Coke is closer to 50% now from dividends alone. Another stock in the Berkshire portfolio that has a long history of rewarding shareholders year after year is Chevron.

The Takeaway

On a closer examination of the positions Buffett holds, a few key insights into what he looks for are apparent.

First, he likes to buy companies that do pay a dividend, even though Berkshire doesn’t pay one to its shareholders.

Second, most of these companies have sustainable competitive advantages that build over time to produce wide moats.

Finally, many are trading a low earnings multiples when Buffett snaps them up and are trading at a discount to fair value too. If you can find that rare combination, you may just have found a stock even Warren would give his stamp of approval.