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The 3 Best Dividend Stocks Owned by Warren Buffett

Aug 18, 2023

Warren Buffett is one of the most successful investors in history. The Oracle of Omaha and long-time business partner grew Berkshire Hathaway (BRK.A) (BRK.B) from a struggling textile manufacturer to a mega-cap conglomerate. Berkshire Hathaway now has an equity investment portfolio worth more than $300 billion.

Berkshire's portfolio is diversified with over 40 individual stocks, many of which pay dividends to shareholders. Plus, many of the dividend stocks have above-average yields which makes them particularly attractive to income investors.

As Buffett celebrates his 93rd birthday, let's discuss three of Buffett's best dividend stocks that have yields above the S&P 500 Index average of 2%.

Bank of America (BAC) , is a financial services giant with a market cap of $230 billion. Its operations include Consumer Banking, Wealth & Investment Management and Global Banking & Markets. The company is a leader in online banking with tens of millions of active digital banking users and strong growth rates across its digital payments solutions. It also has advantages of scale given its massive branch footprint, its digital presence, and its balance sheet that puts it among the largest banks in the world.

Bank of America posted second-quarter earnings on July 18, and results were much better than expected on both revenue and profits. Earnings per-share came to 88 cents, which was five cents ahead of estimates. Revenue was up almost 3% year over year to $25.2 billion, which beat expectations by $260 million.

Net interest income rose $1.7 billion, or 14%, to $14.2 billion. This was driven primarily by benefits of higher interest rates, as well as higher loan balances. Noninterest income was up $795 million, or 8%, due primarily to higher sales and trading revenue, which more than offset lower service charges and investment banking fees.

Bank of America remains highly focused on reducing spending where possible, and it has finally begun building its loan book. The company has almost one trillion dollars of deposits it has not lent out, but rates are moving higher, and the bank is beginning to lend a bit more aggressively. The bank has also aggressively bought back shares in the past, which will help boost earnings per share.

Bank of America started to raise its dividend payout ratio several years ago, but the company still only pays out less than a third of its profits in the form of dividends. The dividend in its current state is still very safe.

BAC shares currently yield 3.3%.

Chevron Corp. (CVX) is the fourth-largest oil major in the world based on its market cap of $300 billion, behind only Saudi Aramco, Shell (SHEL) and ExxonMobil (XOM) . In 2022, Chevron generated 79% of its earnings from its upstream segment, meaning it is more leveraged to the price of oil. Moreover, as Chevron prices some natural gas volumes based on the oil price, nearly 75% of its output is priced based on the oil price.

In the 2023 second quarter, Chevron's production grew 2% over the prior year's quarter thanks to 11% production growth in the Permian, to a new all-time high. Refining margins remained near record levels thanks to the sanctions of western countries on Russia, but oil prices fell. As a result, EPS declined 47%, from $5.82 to $3.08.

Future earnings growth will be driven primarily by rising oil prices, although this is not in the company's control. Chevron will also generate growth from rising production. Chevron is likely to return to growth mode this year thanks to its sustained growth in the Permian Basin and in Australia. The company has more than doubled the value of its assets in the Permian in the last four years thanks to new discoveries and technological advances.

Lastly, earnings growth will be driven by the company's aggressive share repurchase program. Chevron has announced a massive share repurchase program of $75 billion, enough to reduce the share count by 25%.

Chevron operates in a cyclical industry, but the company has increased its dividend for over 30 consecutive years, making it a Dividend Aristocrat. One reason for its dividend safety is that the company invests most of its funds in projects that begin delivering cash flows within two years. In addition, thanks to the high-grading of its asset portfolio, Chevron can fund its dividend even at an oil price of $40.

Chevron has raised its dividend by 6.0% in each of the last two years and is likely to keep raising its dividend in the upcoming years.

CVX stock yields 3.8%.

Kraft-Heinz (KHC) is a processed food and beverages company. It has a diversified food and beverage portfolio including top brands like Kraft, Heinz, Oscar Mayer, Ore-Ida, Velveeta, Philadelphia, Maxwell House, Jell-O, and more.

Kraft-Heinz reported its second-quarter earnings results on August 3. The company reported that its revenues totaled $6.7 billion during the quarter, which was up 3% compared to the revenues that Kraft-Heinz generated during the previous year's period. Organic sales rose 4%. Organic sales growth was primarily possible thanks to price increases.

Kraft-Heinz generated EPS of $0.79 during the second quarter, which easily beat the consensus estimate. EPS were up 13% versus the previous year's quarter, thanks to revenue growth and improved margins. Management expects organic net sales to rise at a 4%-6% rate in 2023, while management is forecasting EPS to come in between $2.83 and $2.91 during the current year.

Kraft-Heinz is not operating in a high-growth industry, but even in a low-growth industry companies can generate positive returns. In Kraft-Heinz' case there are several avenues for growth the company can pursue. The first factor is international expansion. Market penetration in many emerging countries is not very high. These markets are huge, and they are growing relatively quickly. Due to steadily rising disposable incomes in countries such as China and India, more consumers have the means to purchase consumer goods.

Another factor for earnings growth is margin expansion, as Kraft-Heinz' management is experienced in cutting costs. We believe that margins will remain high, and they could rise further over the coming years. Finally, Kraft-Heinz should benefit from debt reduction that results in declining interest expenses.

Kraft-Heinz does not have a long dividend history, and the company cut its dividend in 2019, but the dividend looks sustainable at the current level, with a 2023 expected payout ratio of 56%.

KHC stock currently yields 4.7%.

(BAC is a holding in TheStreet's Action Alerts PLUS portfolio Want to be alerted before the portfolio buys or sells stocks? Learn more now.)

At the time of publication, Ciura had no positions in any securities mentioned.

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