Warren Buffett’s 5 Favorite Dividend Stocks for 2014

Warren Buffett

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A study released by the National Bureau of Economic Research in December demonstrated that, as measured by the Sharpe ratio, Warren Buffett, Chair and CEO of Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) might just be the best investor on the planet. Or, at least, the best money manager among funds that have been around for 30 or more years.

The Sharpe ratio measures the risk-adjusted performance of an investment and can be used as a way to gain insight into where the returns are coming from in a portfolio. Two portfolios with the same returns could have very different Sharpe ratios if one made risky bets and got lucky, and the other made safe bets that produced superior returns. A high Sharpe ratio is arguably the Holy Grail of investing: low risk, high reward.

The average Sharpe ratio for all mutual funds that have been in existence for 30 or more years is 0.37. The Sharpe ratio for the S&P 500 is 0.39, meaning that your typical mutual fund’s risk-adjusted returns are a little below the index at large. Buffet’s Berkshire Hathaway logs an impressive Sharpe ratio of 0.76. All this is just a long-winded way of saying that when it comes to stocks, Buffett knows how to pick ‘em, and any investor would be wise to review his choices and consider if they have a place in their own portfolio. Here are some of the highest dividend-yielding stocks that make up 1 percent or more of his portfolio.

1. ConocoPhillips (NYSE:COP)

Company Yield Stake as a share of portfolio
ConocoPhilips 4 percent 1 percent

It’s been a rough month for ConocoPhillips — shares are down about 4 percent — but the upstream oil and gas company has had a great run over the long term. Shares hit a fresh all time high of $74.59 earlier this year, and the stock is up more than 17 percent this year to date. Growth may be slightly behind the market at large, but as the world’s largest pure-play oil and gas exploration and production company, its stock growth has blown past larger integrated energy industry companies like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). ConocoPhillips also offers a larger dividend yield than its competitors, and isn’t meaningful more expensive (measure by trailing price to earnings) than Chevron.

ConocoPhillips will report earnings at the end of January, and analysts are expecting mixed results. Revenue is expected to contract 9.3 percent on the year to $14.83 billion, but earnings are expected to grow about 8.4 percent to $1.55 per share.

2. Wal-Mart Stores (NYSE:WMT)

Company Yield Stake as a share of portfolio
Wal-Mart Stores 2.4 percent 4 percent

Wal-Mart has faced a lot of bad press this year, but the company has held its own on the stock chart. Shares are up about 13 percent this year to date, although like many other companies December has been rough. Shares are down about 1.6 percent over the past month. There’s some executive-level shuffling going on over at the world’s largest retailer. Earlier in December, Wal-Mart announced that David Cheesewright will serve as president and chief executive officer of international business starting on February 1, the same day his predecessor, Doug McMillion, becomes the Wal-Mart’s CEO.

His successor has yet to be named, but when February 1 rolls around, Cheesewright and McMillion will work together to continue expanding Wal-Mart’s international business amid retail struggles in Mexico and India. Wal-Mart will continue to focus especially on China, the world’s largest retail market, and it will look to Cheesewright to help it finally realize success in the country.

3. Procter & Gamble (NYSE:PG)

Company Yield Stake as a share of portfolio
Procter & Gamble 2.9 percent 4.3 percent

Procter & Gamble is one of the oldest companies on the block, and it has been a beacon of stability in the stock market since it was first traded on the New York Stock Exchange in 1891. The company has increased its dividend at least once per year since 1957, and investors in the company currently enjoy a healthy 2.9 percent yield.

The stock is a staple in many if not most long-term portfolios, and most investors are not expecting dramatic changes in sales or earnings growth in the coming years. After a fairly slow but stead first quarter, analysts are expecting second-quarter revenues to grow less than 1 percent to $22.38 billion, and earnings to contract by a penny per share to $1.21.

4. Coca-Cola (NYSE:KO)

Company Yield Stake as a share of portfolio
Coca-Cola 2.9 percent 16.5 percent

Coca-Cola is about as classic a staple stock as you can get, and it makes up a huge part of Buffett’s portfolio. The soft-drink maker hasn’t necessarily had an easy ride lately, though. Coke suffers flat sales in its major U.S. market, also facing slow sales in Brazil and Mexico. It was recently announced that Americas chief, Steve Cahillane would be leaving the company and that Coke was splitting its North American business into two units.

Coke also lost Buffalo Wild Wings (NASDAQ:BWLD) as a customer to PepsiCo (NYSE:PEP) recently. The loss isn’t catastrophic — coke controls about 70 percent of the soda fountain business in the United States — but it is a signal that Pepsi is not a competitor to be ignored.

5. Wells Fargo (NYSE:WFC)

Company Yield Stake as a share of portfolio
Wells Fargo 2.8 percent 20.1 percent

Wells Fargo is another company that is facing some headwinds right now. The problem is rising interest rates. The average rate for a 30-year fixed mortgage soared as high as 4.6 percent in the third quarter — a level that may not be very high historically, but is significantly higher than the 3.5 percent recorded a year ago. Mortgage origination, a huge part of the bank’s business, has slowed significantly.

The firm also faces some legal black lash from the financial crisis. The bank was named among several others in a series of lawsuits filed by lawyers under Manhattan U.S. Attorney and Wall Street watchdog Preet Bharara.

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