Dividends, Dividends, Dividends. Aside from investing in quality companies, Berkshire Hathaway CEO Warren Buffett is a big fan of dividend stocks.
The legendary billionaire investor knows that profitability is a good sign of a value stock. A better way to assess a company’s profitability is by looking at its dividend distribution to shareholders.
What is a dividend? When an investor buys shares of a company, they are essentially buying part of that company and they become partial owners. The investor, as a partial owner, is entitled to a proportional share of the company’s profits. These cash rewards (dividends) are distributed to shareholders on a monthly, quarterly, semi-annually, or annual basis.
Not all companies pay dividends though. In general, only companies that are profitable and have been for some time payout these distributions to shareholders. This is mostly because unprofitable companies or young companies looking to grow need the cash on hand to invest back into the business. Before continuing, it’s also worth mentioning that not all companies that pay dividends are quality companies. Some companies such as Real Estate Investment Trusts (REITs) are required by the Securities and Exchange Commission (SEC) to pay out dividends to shareholders and some companies will pay out dividends in an attempt to encourage investors to buy into the company.
What Buffett knows though is that a company that pays out a consistent dividend, is likely in good financial health and has proven itself to be a successful business. Especially if it has a track record of increasing the dividend payout to shareholders.
Let’s take a look at some of the Oracle of Omaha’s favorite dividend stocks.
One of his longest-held stocks is credit services provider American Express Company (NYSE: AXP), which has been doubling Buffett’s money on a regular basis.
AmEx has been a part of Berkshire Hathaway’s portfolio since 1993. With a share price of $105.05, AmEx pays out a solid 1.64% dividend ($1.72) per share. This cash reward has occurred every quarter since the turn of the century.
Bank of America
With the Berkshire Hathaway CEO continuing to withdraw the company’s stake in a longtime holding Wells Fargo, it’s become apparent what his new favorite buy-and-hold bank stock is: Bank of America (NYSE: BAC).
Receiving permission from the Federal Reserve Bank of Richmond to exceed a 10% stake in BofA, Buffett’s more than one-billion-share stake in the company should yield almost $744 million in dividend income over the next year.
Boasting a $0.72 per share dividend, Bank of America returns 2.89% back to its shareholders annually. Not too bad when you multiply that by 1,000,000,000 shares.
Beverage giant Coca-Cola (NYSE: KO) has been a staple in Buffett’s portfolio since 1988. Coca-Cola pays out $1.64 per share in dividends which is a mouthwatering 3.27%. Coke has also increased its base dividend for 58 consecutive years making it not just one of Buffett’s highest paying investments but also one of his most consistent and reliable investments.
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