Three Dividend Plays from Warren Buffett
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There are good reasons Berkshire Hathaway(NYSE: BRK-B)(NYSE: BRK-A) doesn't pay any dividends in spite of the fact that the company could easily pay them based on its financial strength. Buffett is arguably the best investor ever alive, and he chooses to have his cash available in order to capitalize superior investment opportunities when he sees them.
The issue has been raised on several occasions, and Buffett has reiterated till boredom that he doesn't believe a dividend is a good idea for Berkshire, so investors shouldn't expect any dividend payments from the company anytime soon. This is seen as a drawback for many of those who love high-quality dividend payers. After all, Berkshire is built with many of the best companies in the world, and dividend investors would probably like to add Buffett's company to a portfolio of outstandingly solid dividend payers.
One interesting alternative could be choosing dividend stocks from the Berkshire portfolio. Of course this wouldn't be the same as investing in Berkshire directly, since this strategy would not provide exposure to many other businesses that Buffett has selected over the decades. But investors would still be able to invest in some of the companies that Buffett likes as much as to hold forever, while at the same time providing some juicy dividend payments.
When thinking about Buffett and his investment philosophy, the first dividend stock that comes to mind is Coca-Cola (NYSE: KO). The biggest soda company in the world owns an irreplaceable brand, which provides an outstanding competitive advantage. Although carbonated drinks are not a high-growth product in the US and other developed countries, they provide stable and reliable cash flows for dividends, among other uses.
The corporation owns many other products like waters and sport drinks with plenty of growth opportunities, and its gigantic distribution network implies that Coca-Cola can distribute its new products all over the planet with an ease that most other companies would envy. Coke pays a 2.7% dividend yield, and those dividends have been increasing in each of the last 49 years.
Procter & Gamble (NYSE: PG) is one of the safest dividend stocks around, and also a part of Berkshire Hathaway's portfolio. Procter & Gamble owns 50 leadership brands that are some of the most renowned household names in the world. Sales of products related to household care, personal hygiene or even food are not very sensitive to the economic cycle, so Procter & Gamble can continue increasing its dividends for a long time regardless of economic conditions.
Shares of this consumer staples giant are yielding a 3.6% in dividends and they have a track record of 55 consecutive yearly increases. Investors don't have much reasons to doubt the sustainability of Procter & Gamble’s dividends.
Tech stocks are not the typical sector where dividend investors usually look for opportunities, but things are changing for this sector. Some technology companies have become very solid enterprises with abundant financial resources and stable competitive advantages. After all, if Buffett has dared to take a considerable position in IBM (NYSE: IBM), dividend investors have good reasons to take a look at the company, especially if they are focusing on alternatives among Buffett's holdings.
IBM has an outstanding brand presence, and management has made the right decision by focusing in high-margin, value-added businesses like software and services, which has generated a notable increase in profit margins and cash flows in recent years. The company pays a modest 1.7% dividend yield, but its payout ratio is particularly low (under 22%) so it has a lot of room for further increases. IBM has increased dividends for 17 years in a row, including a 13% rise last April.
The fact that Berkshire doesn't pay any dividends does not mean that dividend investors lack the opportunity to follow Buffett's wisdom while at the same time investing in companies with well-established dividend policies. Selecting strong dividend companies among those held by Berkshire Hathaway is not a perfect way to replicate Buffett, but it's a pretty good method to follow his investing principles in the dividend field.
acardenal owns shares of IBM. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines, and The Coca-Cola Company. Motley Fool newsletter services recommend Berkshire Hathaway, The Coca-Cola Company, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.