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Get Income Like Warren Buffett: 3 Dividend Stocks in Berkshire Hathaway's Portfolio That Pay You Back
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.
Buffett loves dividends, but doesn't pay them
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.
Image source: The Motley Fool.
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.
1. Coca-Cola is a Dividend King beverage giant
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.
2. Chevron is an all-weather energy stock
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.
The dividend, notably, has been increased annually for 38 years thanks largely to Chevron's solid business model. That said, energy price volatility still has a material impact on the stock price. Right now energy prices are weakening and the dividend yield is a very attractive 4.7%. The yield could go higher if oil prices continue to fall. But the history here suggests that the dividend will continue to get paid even if oil prices continue to fall. You could try to time your entry into Chevron, but the truth is it is a strong energy choice at just about any point of the energy cycle.
3. Kraft Heinz is a turnaround play
The last big dividend stock on this list is Kraft Heinz. It is a tough consumer staples stock to love when you compare it to Coca-Cola. Yes, Kraft Heinz's dividend yield is a lofty 5.3%, but the dividend has been static since it was cut in 2019. The big story is the business overhaul that's taking place.
The company was created via the merger between Kraft and Heinz. The goal at that time was to cut costs to boost profitability. But cutting costs can only take a company so far before it needs to refocus on growth. That's what Kraft Heinz has been doing, after turning to a new management team. But the results haven't been particularly impressive, which is why the dividend has been stuck in neutral for so long. If you consider this high-yield food maker you'll need to go in understanding that it is a turnaround story that will require extra monitoring. It's probably only appropriate for more aggressive investors.
You can invest like Buffett without these stocks
While Buffett owns Coca-Cola, Chevron, and Kraft Heinz in his Berkshire Hathaway portfolio, you don't actually need to own these specific stocks to benefit from dividend reinvestment. These are just three stocks to get you thinking about the real investment tool that's important here, which is the reinvestment of dividends so you can compound your returns over time -- just like Buffett does with his investments.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
