Warren Buffett primarily buys large-cap stocks for Berkshire Hathaway's portfolio. That makes sense because Berkshire has so much money to deploy that smaller companies simply don't move the needle enough for the giant conglomerate.
Because of this focus on large-cap stocks, you probably won't be surprised that Buffett owns six stocks that are members of the Dow Jones Industrial Average(DJINDICES: ^DJI). Which is the best pick of the bunch for income investors right now?
Buffett's Dow six-pack
The two stocks Buffett has owned the longest are both members of the Dow. Buffett initiated a position for Berkshire in Coca-Cola (NYSE: KO) in 1988. He bought shares of American Express(NYSE: AXP) in 1991. Both Coke and AmEx are "forever stocks" for Buffett. In his letter to Berkshire Hathaway shareholders last year, he wrote that the two stocks were among a select group he planned to "maintain indefinitely."
However, Buffett thinks another Dow stock is "an even better business" than Coca-Cola and American Express. He didn't list Apple(NASDAQ: AAPL) in the latest shareholder letter as one of the stocks he would own indefinitely. But when asked about the omission by CNBC's Becky Quick at Berkshire's annual shareholder meeting in 2024, Buffett sang Apple's praises.
It's no coincidence that Apple ranks as Berkshire's largest holding, while AmEx is No. 2 and Coke is No. 4. A Dow stock also holds the No. 5 spot -- Chevron(NYSE: CVX). Buffett began aggressively buying the oil stock in the fourth quarter of 2020 after its steep plunge during the first few months of the COVID-19 pandemic.
Berkshire doesn't have such large stakes in the other two Dow stocks it owns. Both Amazon(NASDAQ: AMZN) and Visa(NYSE: V) make up less than 1% of the conglomerate's portfolio.
How these Dow stocks compare
American Express has been the biggest winner by far over the last 12 months among Buffett's six Dow stocks, with its shares skyrocketing over 70%. Amazon stock has also soared more than 45%. All the others except Coca-Cola have delivered double-digit percentage gains.
Despite its strong performance, American Express' valuation remains more reasonable than most of the others. The financial services giant's forward price-to-earnings (P/E) ratio is 20.5, lower than Coke's forward P/E of 21.1 and well below the forward earnings multiples of Visa, Apple, and Amazon. Only Chevron has a lower valuation, with its shares trading at 12.6 times forward earnings.
What about earnings growth? Amazon is the clear leader. The e-commerce and cloud services leader reported earnings of $15.3 billion in its latest quarterly update, a year-over-year increase of 55%. None of Buffett's other Dow stocks came close to that level of earnings growth in their most recent quarters.
Buffett probably doesn't care what Wall Street thinks about these stocks. In case you were wondering, though, Coca-Cola appears to be analysts' favorite right now. The consensus 12-month price target for Coke reflects an upside potential of 15%. Wall Street is also relatively bullish about Amazon, Apple, and Chevron.
Best of the bunch for income investors
Now, to answer our initial question: Which of Buffett's Dow stocks is the best pick for income investors? There are two main contenders -- Chevron and Coca-Cola.
We can scratch Amazon off the list, since it doesn't offer a dividend. Apple, American Express, and Visa probably won't appeal to income investors much either with their paltry forward dividend yields of under 1%.
Chevron, though, pays a forward dividend yield of 4.05%. The company has increased its dividend for 37 consecutive years. Coca-Cola's yield of 3.1% is lower. However, its track record is even more impressive. The food and beverage maker is a Dividend King, with 62 consecutive dividend increases and counting.
I don't think income investors can go wrong with either Chevron or Coke. However, I think Chevron's higher yield makes it the best of the bunch.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. American Express is an advertising partner of Motley Fool Money. Keith Speights has positions in Amazon, Apple, Berkshire Hathaway, and Chevron. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Chevron, and Visa. The Motley Fool has a disclosure policy.
