Published November 28th, 2016 by Bob Ciura
Warren Buffett is arguably the most legendary investor of all time. His investment firm, Berkshire Hathaway (BRK-B), manages a massive stock portfolio.
Buffett is associated most with value investing. But the Oracle of Omaha has also shown a liking for high dividend stocks. Among Buffett’s biggest holdings are a few high-yield dividend stocks.
Investors can take a look at Berkshire Hathaway’s most recent 13-F filing to view all of Berkshire’s holdings. You can use this to find high yield stocks for your dividend stock portfolio.
Here are three stocks that Berkshire owns which each have dividend yields above 4%.
Verizon Communications (VZ)
Telecom giant Verizon is Warren Buffett’s highest-yield holding. The stock recently had a dividend yield near 5%.
The company has increased its dividend payments for 10 consecutive years. This makes Verizon a member of the Dividend Achievers Index; a select group of businesses with 10 or more consecutive years of dividend increases. You can see all 273 Dividend Achievers here.
Berkshire Hathaway owns slightly more than 15 million shares of the company.
Verizon has such a high dividend yield because the company is a cash cow. Its highly profitable business, particularly in wireless cellular phone service, allows the company to return lots of cash to shareholders.
Verizon’s business is split into two segments:
- Verizon Wireless (71% of total revenue)
- Verizon Wireline (29% of total revenue)
Verizon generated $21 billion of free cash flow last year, and with it paid $8.5 billion of shareholder dividends.
The U.S. telecom industry is highly competitive, but Verizon generates high margins and cash flow because of its top-tier network. This provides the company with pricing power.
Last year, the company generated $91.2 billion of revenue from wireless service, up 4.6% year over year.
Going forward, Verizon should continue to grow. It has conducted several significant acquisitions lately to drive future growth in the Internet of Things (or IoT), and digital advertising:
- $4.8 billion for Yahoo! (YHOO)
- $4.4 billion for AOL
- $2.4 billion for Fleetmatics (a GPS tracking/vehicle software company)
Other meaningful acquisitions include Telogis, Complex, and Volicon.
The goal of these acquisitions is to have a greater presence in connectivity. Things like smart homes and smart cars are attractive areas for future growth.
Verizon’s IoT revenue increased 18% last year. Despite its success, Verizon’s stock price has declined recently, making its valuation more compelling.
With continued growth in these areas, Verizon should have no trouble maintaining its hefty dividend. Last year, the company’s declared dividends represented 55% of its earnings-per-share in dividends. That is a fairly modest payout ratio that speaks to Verizon’s high-quality business model.
General Motors (GM)
U.S. automakers, including GM, have had a difficult run over the past year. Shares of GM have been stuck in reverse throughout 2016.
In the past 52 weeks, GM stock is down 6%. This is despite strong sales totals, thanks to low interest rates and low gas prices. Last year, GM booked record net profit of $9.7 billion.
Auto stocks continue to perform poorly, as investors doubt the good times will last. Interest rates are set to rise going forward, which could put a dent into auto sales.
However, GM has not slowed down a bit so far this year. Last quarter, net income hit a record $2.8 billion. Revenue increased 10% and also hit a quarterly record.
GM sold 2.4 million vehicles last quarter, up 3.8% from the same quarter last year. Year-to-date sales through the first nine months of the year rose 0.4%.
Multiple brands are performing well in the U.S. The Chevrolet brand posted its best third-quarter domestic retail performance in the past decade. Buick had its best performance in the U.S. in the past 11 years.
This is helping GM take market share. U.S. retail share grew 0.4% last quarter, the highest third-quarter total in the past five years.
The results are particularly strong abroad. GM’s sales in China rose 9% last quarter and reached a record of 2.7 million vehicles.
In Europe, GM’s Opel and Vauxhall brands posted a 5.1% sales increase.
Not only is GM increasing sales, it is expanding margins as well. The company is making great progress in nearing profitability overseas. For example, GM has reached break-even in Europe over the first three quarters of the year.
In the U.S., GM has reached double-digit profit margin before interest and taxes, for five out of the last six quarters.
GM currently pays an annual dividend of $1.52 per share. The stock has a 4.5% forward dividend yield.
Berkshire owns 50 million shares of GM, equal to a $1.6 billion investment.
Berkshire owns 3.9 million shares of Sanofi, a health care company based in France. Sanofi is a giant in the industry.
It operates 100 manufacturing sites, and sells its products in more than 170 countries around the world. The stock has a market capitalization of $106 billion.
The company operates in five core therapeutic areas: specialty care, general medicines and emerging markets, vaccines, animal health, and lastly diabetes and cardiovascular.
Last year, Sanofi generated $31.8 billion of total sales. Its sales breakdown according to therapeutic area is as follows:
- 31% established pharmaceuticals
- 20% diabetes
- 13% vaccines
- 10% Sanofi Genzyme
- 10% consumer health products
- 7% animal health
- 5% generics
- 4% oncology
Sanofi’s most important product area is pharmaceuticals, but the company is adequately diversified across many operating areas.
This diversification will help the company in the event of further deflation of drug pricing, which is a present concern for large pharmaceutical companies.
That is helping the company continue to grow to start 2016. Over the first three quarters, total company sales rose 1.2%. Core earnings-per-share increased 5.8% in the same period.
Going forward, Sanofi management has instituted an ambitious plan to reenergize growth. The plan is called the 2020 Roadmap. It involves pursuing growth by investing significantly in research and development to spur innovation, and cost cuts to grow margins.
Sanofi invested $5.5 billion into R&D last year, and the company plans to increase R&D spending to more than $6.3 billion by 2020.
Another key part of the company’s growth strategy is expansion into new geographic territories. Just 36% of the company’s sales are derived from the U.S.
Approximately 32% of sales come from the emerging markets. This is a wise strategy, as economic growth in the emerging markets should exceed growth in mature economies like the U.S.
For example, last quarter Sanofi’s emerging market revenue increased 5.6%, driven by diabetes and rare diseases products.
Sanofi has a 4.1% dividend yield. This is more than double the average dividend yield of 2%.