BACRP - Buffett Doesn't Buy High Dividend Stocks For Income

2023-08-29 09:00:00 ET

Summary

• Warren Buffett's Berkshire Hathaway Inc. collects billions of dollars in dividends from its portfolio holdings.
• Even so, none of them are derived from "high yield" stocks.
• In the following piece, we take a deep dive into which dividend stocks Buffett actually owns and what his thought process may be behind these selections.

Warren Buffett's Investing Strategy

Collecting dividends from his holdings is a big part of Warren Buffett's investment strategy, to be sure. Buffett's Berkshire Hathaway Inc. ( BRK.A , BRK.B ) collects billions in dividends from its portfolio holdings. The majority of the billions in dividend payments are derived from his top five holdings.

Berkshire Hathaway Top Five Holdings

All told, Buffett brings in $3.4 billion from his top five positions. Apple Inc. ( AAPL ) , Bank of America ( BAC ) , American Express Company ( AXP ) , The Coca-Cola Company (KO) , and Chevron Corporation ( CVX ) out of about $5.7 billion estimated overall.

Dividends collected from top five holdings

Even so, you will notice that none of them are "high dividend" or "high yield" stocks. In fact, they are very low yielding stocks when it comes to the dividend. Apple, which is Buffett's largest holding comprising 45% of the entire portfolio, yields a paltry 0.53%. What's more, the highest yielding stock is Chevron, coming in at 3.58%. See below dividend summaries for each name.

Coca-Cola Co.

Bank of America

Apple Inc.

Chevron Corporation

American Express Company

Buffett's successful investment strategies are legendary. So much so, many have studied his style in an attempt to emulate his success, myself included. I've been a Buffett Aficionado my entire life. I was actually born in Omaha, Nebraska. My father retired from U.S. Air Force Intelligence after working at Strategic Air Command right outside Omaha. He then became a stockbroker in Omaha and ran in the same circles as Buffett back in the day. My father had a similar investing style as Buffett, with some tweaks, of course. What is Buffett's style?

Buffett's Investing Style (My Take)

Not A High-Yield Investor

I see a lot of articles invoking Buffett's name in the title. In the article, the author often states what they believe is Buffett's investing style and how it relates to their recent selection. Many times the picks are very high-yield securities. Since I've been studying Buffett my entire life, I thought I'd throw in my two cents.

The fact of the matter is Buffett and his team don't look for companies that have extremely high yields and return a majority of the profits to shareholders. I do not see Buffett as a high-yield investor whatsoever. The proof is in the pudding, as it were. Just look at these top five dividend payers, not one of them yields over 5%. Here is my take.

Buffett is a Long-Term Value/Growth Investor

Buffett is not a yield chaser in any sense of the phrase. He looks for companies which have strong growth prospects paying dividends with low to moderate yields. Buffett invests in companies he plans to hold for the long term. He looks for companies that will be able to sustain and hopefully increase the dividend and share price over time.

Buffett is a long-term value/growth investor. The dividend payments are the cherry on top. By the way, Buffett does not reinvest the dividends. He stockpiles them into Berkshire’s substantial cash hoard, currently $147 billion, which he uses to make opportunistic buys. I often see many state “your cash is trash” as well. Not according to Buffett, evidently. Moreover, the dividends are only one small piece of Buffett's investing puzzle. Growth leading to capital appreciation accounts for a substantial amount of Buffett success over the years. Let's take a look at the Coca-Cola Co investment for instance.

The Coca-Cola Co Example

In 1994, Berkshire bought Coca-Cola for $1.3 billion and received $75 million in dividends that year. In 2023, by my calculations, Berkshire is expected to receive $1.2 billion in dividends from its Coca-Cola position. What’s more, the size of position is up approximately 20-fold to $24 billion. The capital appreciation of the stock is a major contributing factor to Buffett’s success.

(By the way, I consulted for Coca-Cola while working for Ernst & Young back in the late '90s. If you ever are in Atlanta, I definitely recommend taking the " World of Coca-Cola Museum " tour.)

Now let me explain my unique investing style I've developed over the past 30 years by learning from Buffett, other investing greats, and the school of hard knocks.

My Investing Style

My father’s investing style, and now mine, includes investing in growth stocks I feel have the potential for exponential capital appreciation coupled with high yield stocks for income creation. Let me explain.

At 59, my investing strategy involves buying both high-yield stocks as well as growth stocks. I have four core portfolios presently. Two dedicated to dividend stocks focused on income production and two dedicated to growth stocks focused on capital appreciation. The two portfolios for each category are separated by high and low risk.

Over time, I have been taking profits and trimming my winners in the growth portfolio and adding to my income-generating positions. Right now I'm at about a 60/40 split between income and growth. As I grow older, that weighting will become more and more towards income rather than growth.

Even so, my father always had between 5-10% of his portfolio dedicated to his latest growth ideas. One of his last picks prior to him passing a decade ago was Tesla ( TSLA ). Tesla actually turned out to be his best pick ever. I have to say, it never would have happened except for my mother's insistence that no one change any of my father's picks after he passed.

Now, let's bottom line this piece.

The Bottom Line

The bottom line is to have a well-diversified portfolio of stocks. Stocks in companies you feel have a solid long-term growth story which will provide the opportunity for both the growth in the dividend and share price over the long haul. In my younger days, I was more weighted towards growth and speculative investments. Now, I am in the process of building up my income-producing investments. I don't expect my high yield income stocks to provide a ton of capital appreciation. I'm shooting for them to at least not lose any value. The fact of the matter is you need to be diversified not just by sector, i.e., energy, tech, but also by type, i.e., growth vs. income.

Dividend-paying stocks, especially high-yield payers, tend to move in and out of favor just like all other types of stocks. Having a portfolio of all high-yield stocks, even if it is spread over various sectors and structures, increases your downside risk. My goal is to end up holding a portfolio of stocks with moderate-yielding sustainable dividends for income which have the opportunity for capital appreciation as well. Just as Mr. Buffett has done.

One last insight I'd like to leave you with is this. Over the years, I've learned it is often not a good idea to mimic Buffett's exact picks. Buffett is a very shrewd negotiator. He will often get a very special deal, like he did with BofA, for example. Also, once the word is out that Buffett has bought in to a stock, it's more often than not too late. You are most likely buying in at just the wrong time. Remember, it's buy low, sell high, not the other way around. The time to buy the stock was before it was announced that Buffett bought in. Those are my thoughts on the matter. I look forward to reading yours.

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