Warren Buffett’s Best Dividend Stocks

Consider adding these big payers, all owned by Berkshire Hathaway, to your portfolio.

When it comes to dividends, Warren Buffett is happy to collect them but not to pay them. His holding company, Berkshire Hathaway (symbol BRK-B (opens in new tab)), has never paid out any of its profits to shareholders. But when the Oracle of Omaha looks for companies to invest in, he often focuses on businesses that repurchase shares or issue dividends, or both. “Buffett likes companies that return cash to shareholders,” says David Kass, a finance professor at the University of Maryland who owns Berkshire shares and follows Buffett’s moves closely. Investors could do worse than to follow the master’s lead. And if you’re looking for current income, you might want to consider some of Buffett’s favorite dividend-paying stocks.

Quiz: How Well Do You Really Know Warren Buffett?

In his latest letter to Berkshire shareholders (opens in new tab), released February 28, Buffett does hold out hope that Berkshire might pay a dividend someday. He suggests that in 10 to 20 years, the company may have grown so large that it will be hard for it to allocate its capital efficiently. In that case, he says, its leaders will have to choose between paying dividends or, more preferably in Buffett’s view, buying back shares if the stock is cheap enough. In either case, given Buffett’s age, 84, someone else is likely to be making those decisions.

Regardless of how Buffett feels about paying dividends, you might want to consider some of Buffett’s favorite dividend-paying stocks if you’re looking for current income. But you have to be judicious. We don’t normally second-guess the master, but we have doubts about some of his holdings. Berkshire, for example, has continued to hold shares of Coca-Cola (KO (opens in new tab)), Buffett’s largest position, even though U.S. consumers are drinking less soda and analysts have been lowering their 2015 earnings forecasts. Last year, Buffett added to an already sizable position in International Business Machines (IBM (opens in new tab)), a stock that we suggested selling in December because the tech giant had failed to keep up with industry changes. Around the same time, Berkshire increased its stake in Deere & Company (DE (opens in new tab)), even though the maker of farm equipment has warned that sales for the fiscal year that ends in October could fall 17% as the agriculture sector experiences a temporary slowdown.

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All three stocks may end up performing brilliantly in the months and years ahead. But Buffett holds plenty of other dividend payers that we think are more attractive. The following four companies have solid earnings and sales outlooks for 2015. The stocks yield nearly 3% or more, well above the 2% yield of Standard & Poor’s 500-stock index. And all but one of the firms recently announced a dividend hike. (The stocks are listed in alphabetical order. Prices and related figures are as of February 26.)

Start with General Electric (GE (opens in new tab), $25.89, yield 3.6%). During the 2008 financial crisis, Buffett pumped $3 billion into GE in the form of preferred stock with a 10% annual dividend to keep the company afloat. The industrial conglomerate has since recovered, and Buffett walked away with a sizable profit, plus about $260 million worth of GE common stock. Today, CEO Jeffrey Immelt is shrinking GE’s financial-services business, which tripped up the company in 2008, and focusing instead on GE’s core industrial segments, which produce everything from jet engines to gas turbines. Because of plummeting oil prices, sales to energy firms are dragging down results; they fell 6% in the fourth quarter compared with the same period in 2013. But industrial revenues jumped 9% for the same period. GE announced a 5% dividend hike in December. Analysts expect earnings to increase by an equal amount, to $1.73 per share, in 2015. The stock trades at 15 times that figure, compared with 17 for the S&P 500.

From bankruptcy to a recall crisis, General Motors (GM (opens in new tab), $37.56, 3.2%) has also faced its share of troubles. But the automaker is on the road to recovery. Buffett must certainly think so. In the fourth quarter, he upped his stake in GM by 3%, to 41 million shares, which are now worth $1.4 billion. S&P Capital IQ analyst Efraim Levy says U.S. auto sales should rise 2.7% in 2015. That, plus fewer recall expenses and a growing perception that GM cars are getting better and can hold their own against those from foreign manufacturers, will boost GM’s results. Consumer Reports on February 24 named the Chevrolet Impala and Buick Regal among the magazine’s top 10 picks for 2015. Analysts see the automaker’s earnings surging 49% in 2015. With things looking up, GM execs have announced plans to increase the dividend 20% in coming months. And the stock is cheap, trading at just 8 times estimated 2015 profits.

This past holiday shopping season wasn’t a windfall for United Parcel Service (UPS (opens in new tab), $101.86, 2.9%). Fourth-quarter profits came in at $1.25 per share, well below analyst expectations of $1.42. Higher costs were largely to blame as Big Brown boosted staff and invested in technology to make sure packages were delivered on time. The stock, meanwhile, has slumped 11% since reaching a record closing high on January 22, the day before fourth-quarter results were released. But Nate Brochmann, an analyst at investment bank William Blair & Company, says he doesn’t think the selloff will last long. He says UPS will learn from the experience and become more efficient. Moreover, growth of e-commerce in the U.S. and Europe should help drive profits. Analysts think earnings will increase 9% this year, to $5.17 per share, giving the stock a price-earnings ratio of 20. As if to show they’re not fazed about the recent earnings disappointment, UPS directors raised the payout by 9% in February.

The biggest yielder in Berkshire’s portfolio is Verizon Communications (VZ (opens in new tab), $49.37, 4.5%). The wireless giant’s payout is more than twice that of the S&P 500. Verizon is something of a contrarian play. It is being hurt as more consumers sign up for wireless-service plans with lower monthly fees and, in some cases, no contracts (at the cost of forgoing a subsidized phone). That in turn has made it tougher for wireless companies to hang onto customers. But Verizon maintains one of the leading networks, and although the number of subscribers cutting ties has increased, Verizon’s churn rate—the percentage of subscribers ditching their wireless plans—is comparatively good: 1.14% in the fourth quarter of 2014, compared with 1.22% at AT&T and 1.7% at T- Mobile. Although Verizon is contending with more price-conscious customers, analysts estimate that its earnings will increase by a robust 9% this year, to $3.66 per share. The stock trades at a modest 13 times earnings.

Contributing Writer, Kiplinger's Personal Finance
Carolyn Bigda has been writing about personal finance for more than nine years. Previously, she wrote for Money, and is a regular contributor to the Chicago Tribune.