Are dividends boring? Maybe, but boring tends to make for good investing. Dividend-paying stocks can provide a stable source of cash flow that exceeds the rate on bonds or savings accounts. However, investors may want to consider some timeless advice from the Oracle of Omaha before pulling the trigger.
Warren Buffett, one of the wealthiest men in the world, does not pay Berkshire Hathaway shareholders a dividend. Nonetheless, he has provided insightful views on the subject over the years, and holds some of the biggest dividend names in the market. Buffett believes management should think twice about when to retain earnings and when to distribute them to shareholders. As he explains in a past shareholder letter, “Allocation of capital is crucial to business and investment management.”
If earnings that are needed to run the business are paid out in dividends, the company could suffer from declining sales, lose its competitive advantage, and damage its financial strength. Buffett notes, “No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused.”
Currently, Buffett believes Berkshire Hathaway should retain its earnings in favor of paying out a dividend. The company is able to put those earnings to better use, and shareholders even receive indirect benefits from Berkshire Hathaway investing in large, stable companies that often pay attractive dividends. In fact, Berkshire Hathaway’s largest equity positions found in its 13F filing all pay dividends.
Let’s take a look at five Buffett-approved dividend stocks that do not appear to be destined for oblivion:
1. General Motors
The famous Detroit-based automaker is not typically known for its dividend power, but with a yield of 4.4%, it’s hard to ignore this Buffett-approved stock. As of the end June 2015, Berkshire Hathaway held 41 million shares of GM, worth almost $1.4 billion.
GM has seen plenty of speed bumps over the past decade, including bankruptcy, government bailout, and enough recalls to last it a lifetime. However, GM reinstated a dividend last year for the first time since 2008, and auto sales continue to rebound from the Great Recession. Net revenue in the second quarter totaled $38.2 billion. Retail deliveries surged 17% year-over-year in September, marking the sixth consecutive month that GM has increased retail market share.
“The U.S. is adding jobs, disposable income is rising, energy prices and interest rates remain low and business continues to invest, but the fact remains this has been a slow recovery,” said Mustafa Mohatarem, GM’s chief economist, in a press release. “The economy still has room to grow and so do auto sales, particularly now that the Millennials are entering the workforce and starting households.”
2. Verizon Communications
Verizon is one of the largest communication technology companies in the world, with 109.5 million wireless retail connections and over 200 data centers. It has more than 178,000 employees in 150 countries. Total operating revenues in the second quarter of 2015 totaled $32.2 billion.
Berkshire Hathaway holds about 15 million shares of Verizon, according to the most recent SEC filing. Buffett and company purchased a new position in Verizon during the first quarter of 2014, and raised its stake in the following quarter. Verizon doesn’t manage to crack Buffett’s top equity positions, but shares offer the highest dividend yield, at 5.1%. Verizon has also increased its dividend for nine consecutive years, and made $4.3 billion in cash dividend payments in the first half of 2015.
Wal-Mart shares are wearing a yellow rollback sticker these days. The world’s largest retailer finds its stock about 40% off from all-time highs made earlier this year, leading to a dividend yield of 3.3%. Buffett is certainly not one to panic over a declining share price. Berkshire Hathaway maintained its 60.4 million share position in Wal-Mart during the second quarter, worth $4 billion. The position had previously been worth $5.2 billion at the end of 2014.
Wal-Mart first offered common stock to the public in 1970 and began trading on the New York Stock Exchange in 1972. Since 1974, the retailer has provided a quarterly cash dividend to investors. Wal-Mart has also raised its dividend every year.
“We are proud of our history of consistent shareholder returns. This will mark 42 consecutive years of increasing dividends for our shareholders,” said Charles Holley, executive vice president and chief financial officer, in a February press release. “The strength of our balance sheet and strong free cash flow continues to enable a dividend increase, even as we invest more to strategically position Walmart to better serve our customers.”
4. Wells Fargo
Founded in 1852, America’s most profitable bank is also Buffett’s top holding. Berkshire Hathaway held 470.3 million shares of Wells Fargo at the end of the second quarter, worth $26.4 billion, according to the most recent SEC filing. Berkshire Hathaway increased its stake by 6.5 million shares at the beginning of 2015.
In April, Wells Fargo announced a quarterly dividend of $0.375 per share, an increase of 7% from the prior quarter. The dividend hike was part of Wells Fargo’s 2015 Capital Return program that received no objection from the Federal Reserve. The bank currently has a dividend yield of about 2.9%, with a payout ratio of 35%. Wells Fargo has been paying a dividend since 1993, and has generally increased it every year.
5. General Electric
GE did the unthinkable during the financial crisis and slashed its dividend for the first time in 71 years. The widely-held conglomerate nearly pulled the plug completely as the quarterly dividend was cut to $0.10 from $0.31 in February 2009. Since then, GE has been trying to rebuild its business operations and shareholder trust. In fact, GE has raised its quarterly dividend seven times in the past five years. The current quarterly payout is $0.23 per share, which is relatively safe and good enough for a yield of 3.3%.
While Berkshire Hathaway held almost 10.6 million shares, worth $281.3 million, at the end of the second quarter, Buffett is not the only whale swimming in GE. Activist investor Nelson Peltz, CEO and founding partner of Trian Fund Management, recently disclosed a $2.5 billion stake in GE. He believes the company is undervalued and under appreciated, given GE’s efforts to streamline its business operations.
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