Warren Buffett is a widely recognized name in the investment world, known for his influence and expertise. His strategies are closely followed by many aspiring investors, reflecting the high regard in which he is held. What sets Buffett apart is his steadfast commitment to the investment principles that have guided him throughout his career, with a strong focus on value investing. In addition to value strategy, Buffett is also inclined toward dividend stocks.
Dividend stocks have long been a cornerstone of Berkshire Hathaway’s portfolio, accounting for over 90% of its holdings. Buffett’s preference for dividend-paying stocks has frequently been discussed in the media, especially given that Berkshire itself does not distribute dividends. He is recognized for his disciplined approach, focusing on acquiring stocks with the intention of holding them for extended periods—often spanning years or even decades. This long-term outlook enables him to take advantage of compounding returns while staying resilient through market fluctuations. His strategy has delivered strong results, with the portfolio overseen by Buffett and his team expected to generate approximately $6 billion in annual dividend income. Notably, just seven companies are anticipated to generate $4.5 billion in annual dividends for his company.
Buffett's commitment to holding stocks for the long term is often seen as a crucial element of his investment success. Peter Kunhardt, a director of the HBO documentary “Becoming Warren Buffett”, made the following comment in his 2017 interview:
“You don’t have to trade things all the time; you can sit on things, too. You don’t have to make many decisions in life to make a lot of money.”
Buffett’s dividend investing strategy isn’t centered on chasing the highest yields. Instead, he focuses on finding strong, well-managed companies that can sustain and grow their dividends over time. He favors steady, reliable businesses with moderate yields over riskier stocks with higher payouts. Given Buffett’s track record, it’s clear that his approach is well-founded, as dividend stocks have played a crucial role in overall market returns. Between 1993 and the end of 2022, the broader market rose by 777%, but when dividends were included, the total return exceeded 1,400%. This highlights the significant contribution of dividends, accounting for more than 20% of the market’s overall gains during that period.
Examining the performance of dividend stocks over earlier periods reveals that they have played a substantial role in overall market returns. Dividends have historically been a major contributor to the total returns of US stocks, making up nearly one-third of overall equity gains since 1926. From 1980 to 2019, a period characterized by declining interest rates, dividends accounted for 75% of the broader market’s returns. In such environments, dividends become even more valuable, providing consistent income when bond yields are lower. Companies that start paying dividends tend to maintain them and often increase their payouts over time. In addition, issuing dividends can make a stock more attractive to investors, potentially driving up its market value.
By the close of Q3 2024, most companies in Buffett’s portfolio had a strong track record of paying dividends and steadily increasing them over time. Given this, we will take a look at some of the best dividend stocks in Warren Buffett’s portfolio.
Our Methodology:
For this article, we analyzed Berkshire Hathaway’s 13F portfolio as of the third quarter of 2024 and identified dividend stocks. From that group, we picked 13 stocks with the highest number of hedge fund investors, tracked by Insider Money as of Q3 2024. The stocks are ranked in ascending order of hedge funds having stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Is Moody’s Corporation (MCO) Among Warren Buffett’s Longest-Held Stocks?
A hand holding a rating chart, emphasizing the importance of credit ratings in the financial services sector.
Moody's Corporation (NYSE:MCO) is an American multinational financial services company. The company operates through two primary segments: Moody’s Investors Service (MIS) and Moody’s Analytics (MA). MIS provides credit ratings for debt instruments and issuers, while MA delivers data, software, and advisory services centered on financial risk management. This dual approach enables Moody’s to generate revenue from both subscription-based services and fees for its ratings and analytics. The diversity of these segments helps protect the company from cyclical market fluctuations, ensuring a consistent revenue stream even during downturns in the credit ratings industry.
In the third quarter of 2024, Moody's Corporation (NYSE:MCO) reported strong earnings, driven by the success of its highly-rated ratings franchise. The company generated $1.8 billion in revenue, marking a 23% increase compared to the same period last year. This robust revenue growth supported product development and innovation. In addition, Moody’s formed several strategic partnerships with leading industry firms to expand the reach and impact of its data and insights.
Moody's Corporation (NYSE:MCO) is a solid company in terms of dividends, with its robust cash reserves ensuring it can maintain dividend payments for years to come. In the first nine months of the year, the company reported an operating cash flow of over $2.1 billion, and its free cash flow came in at $1.9 billion. Due to this cash position, the company was able to raise its payouts for 14 consecutive years. It currently pays a quarterly dividend of $0.85 and offers a dividend yield of 0.67%, as of February 10.
Overall MCO ranks 8th on our list of the best dividend stocks according to Warren Buffett. While we acknowledge the potential for MCO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
