Warren Buffett is famous because of the long-term success he has achieved running Berkshire Hathaway. But there are two interesting things about this company. First, it is run kind of like a mutual fund. Second, it doesn’t pay dividends despite the fact that Buffett often invests in dividend-paying companies. Here’s why that matters and why you might want to buy one of these three dividend payers he owns.
One of the core tenets of Buffett’s investment approach is to buy good companies when they are attractively priced. But the next step is to hold for the long term so he can benefit from the growth of the businesses he buys. One of the nuances that gets lost in this is that he uses the cash generated from the companies he owns outright or owns in Berkshire Hathaway’s common stock portfolio to reinvest in his business. That allows him to compound those cash flows over time and this enhances the returns he generates for investors.
From a big-picture perspective, you can do the same thing by dividend reinvesting. All it takes is a phone call to your broker, or, more likely, a button press on your broker’s website or in its app. And in one quick and easy move you’ll be investing more like Warren Buffett.
But what if you want to invest even more like Oracle of Omaha? Well, three dividend-paying stocks he owns today are Coca-Cola (NYSE: KO), Chevron (NYSE: CVX), and Kraft Heinz (NASDAQ: KHC). Here’s a look at these three Buffett stocks to see if they’ll be a good fit for your Buffett style dividend reinvesting.
Coca-Cola is a very easy company to like. It is the industry-leading beverage company with a globally diversified business. It is large enough to have economies of scale in distribution, marketing, and research and development, and it can, and does, act as an industry consolidator. The dividend has been increased annually for over five decades, making it a Dividend King. The dividend yield is 2.9%, which is well above the market’s yield today.
For conservative dividend investors it is a solid choice. The only problem is that the stock looks a little expensive at the moment, with both the price-to-sales and price-to-earnings ratios above their five-year averages. However, if you are willing to pay a premium for income security, Coca-Cola could be a good fit for your portfolio.
Another industry leader in Buffett’s portfolio is energy giant Chevron. It is one of the largest integrated energy companies you can buy, with a business that spans from the upstream (energy production) through the midstream (pipelines) and into the downstream (chemicals and refining). This diversification helps to soften the impact of the inherent swings in the commodity-driven energy sector. On top of that, the company has a very strong balance sheet, which allows it to take on leverage during industry downturns to support its business and dividend.
