Warren Buffett is arguably the greatest investor of all time. He’s produced a 20%+ compound annual gain over the last 50+ years. Along the way, he built a $120 billion fortune for himself.
And that’s after giving away billions of dollars to charity. Being invested alongside Warren Buffett is rarely a bad place to be. Instead, it’s usually a fantastic place to be.
Buffett oversees a $320 billion common stock portfolio through his conglomerate, Berkshire Hathaway Inc. This portfolio has more than 40 different businesses in it.
As a long-term dividend growth investor, I often find myself invested in the same businesses as Buffett.
That’s because he tends to invest in high-quality businesses that pay reliable, rising dividends. Does that ring a bell?
Buffett might not explicitly call himself a dividend growth investor, but his actions speak louder than words. And there are three dividend growth stocks in this portfolio that look particularly interesting right now.
Buffett has invested a combined total of over $150 billion in these three names alone. Today, I want to tell you about three Buffett-owned dividend growth stocks that look buyable. Ready? Let’s dig in.
The first Buffett-owned dividend growth stock I want to highlight is Apple (AAPL).
Apple is a multinational technology company with a market cap of $2.7 trillion.
I’ve said it before. I’ll say it again. In my view, Apple is a must-own stock for serious dividend growth investors. Since Buffett is one of the most serious investors I’ve ever had the pleasure of studying, and since I’d argue he’s a dividend growth investor in disguise, it shouldn’t be a surprise to see that he’s invested in Apple. And boy, is he invested.
Warren Buffett’s position in Apple has a market value of $147 billion.
That’s right. Berkshire Hathaway owns more than 887 million shares in the tech giant. By extension, through this massive investment, Berkshire Hathaway is kind of like a tech giant in and of itself. As Apple goes, so will Berkshire Hathaway – to a large degree.
So what does Warren Buffett like about Apple?
Well, I might ask the inverse to that question. What doesn’t Buffett like about Apple? There’s almost nothing to dislike here. Apple is a dominating force in tech, with products ranging from their iconic iPhone to the Apple Watch to the iPad to the MacBook and so on.
Then you have services like the App Store, iCloud, Apple Card, Apple Music, and Apple TV+. And there are huge future growth opportunities for them in mobility and AR/VR. The future could be even brighter than the past. And I don’t say that lightly. This is a company that’s more than doubled revenue and more than tripled EPS over the last decade.
Great business growth leading to great dividend growth.
Indeed, Apple has increased its dividend for 10 consecutive years, with a five-year dividend growth rate of 9.2%. And there should be a lot more where that came from. This is one of the safest dividends I know of. The payout ratio is only 14.6%, which positions the dividend for plenty of continued growth.
There’s also the fact that there’s $200 billion in total cash and marketable securities they have on the balance sheet. Now, the stock only yields 0.5%, so this is more of a compounder than an income play. But Buffett is a legendary compounder who knows another legendary compounder when he sees it.
This must-own legendary compounder even has a reasonable valuation.
With a P/E ratio of 27.5, it’s not the cheapest stock in the market. But why would it be? It’s Apple! You don’t get a diamond for the price of a cubic zirconia. Quality is worth paying up for. And this one of the highest-quality businesses on the planet. Now, it’s not necessarily cheap. But it is reasonable.
That multiple isn’t much higher than the market average as a whole, even though this is definitely an above-average business. This is Buffett’s largest single position in the common stock portfolio he oversees for Berkshire Hathaway. That’s how much confidence he has in it. If you want to invest alongside Buffett in a meaningful way, Apple is the way you do it.
Next up, let’s talk about Johnson & Johnson (JNJ).
Johnson & Johnson is an international healthcare conglomerate with a market cap of $462 billion.
This is one of my very favorite dividend growth stocks. It offers so much balance and quality across the board. Not only do they do many things great, but they also do pretty much nothing terribly. They’re either really good or outright excellent in every area in which they compete.
Warren Buffett has owned shares in Johnson & Johnson for more than 15 years.
Buffett is known for his very long holding periods. He’s the epitome of a long-term investor. And Johnson & Johnson is the kind of business that you want to own for the long term. It’s not some momo bubble stock that might act like a lottery ticket… or a total bust. It’s instead a world-class business that steadily chugs along, slowly but surely growing year in and year out like clockwork.
This is not a get-rich-quick thing. This is a wonderful long-term investment that can make you slowly wealthy.
We’re talking about a company that has three major businesses under one roof – pharmaceuticals, medical devices, and consumer health products. Boring? Maybe. You know, it’s been said that successful long-term investing is a lot like watching paint dry.
But I don’t think there’s anything boring about compounding at 13.5% over the last 10 years, which is what this stock has done. Using the Rule of 72, that rate of compounding doubles your money every 5.3 years. A little more exciting now, right? Well, hold on to your hat… because it gets even more exciting.
This Dividend Aristocrat has one of the most reliable dividends you’ll ever find.
Johnson & Johnson has increased its dividend for 59 consecutive years. That time frame stretches across wars, multiple US presidents, recessions, massive inflationary periods, stock market crashes, and even a global pandemic. You can almost set your watch by the quarterly payout of the dividend and the annual increase of it. The 10-year dividend growth rate of 6.4% won’t blow anyone away, nor will the yield of 2.4%.
This isn’t about huge numbers with questionable sustainability. This is a balanced, ultra-reliable dividend that you can sleep well at night with. The payout ratio of 40.3%, based on this year’s midpoint guidance for adjusted EPS, shows how safe the dividend is. And there’s also the amazing balance sheet. This company is one of only two in the world with a AAA credit rating from Standard & Poor’s.
Despite the quality and balance, the valuation is not at all egregious.
Using that aforementioned guidance, the forward P/E ratio is only 16.7. I don’t think there’s anything expensive about that, especially when we’re talking about a Dividend Aristocrat with a AAA-rated balance sheet.
Let’s be clear. This is one of the top companies in the world. It’s the kind of high-quality dividend growth stock that can be the cornerstone of a portfolio. Buffett’s $57 million position in Johnson & Johnson isn’t big by his standards, but it would be for the rest of us mere mortals. Investing in Johnson & Johnson allows you to exist in a Dividend Aristocrat-and-Warren Buffett nexus. I can’t imagine you’d be unhappy with that over the coming decades.
I now have to quickly tell you about Verizon (VZ).
Verizon Communications is a multinational telecommunications conglomerate with a market cap of $215 billion.
Another dividend growth stock. Another Buffett holding. This shouldn’t be a surprise. After all, high-quality dividend growth stocks represent equity in world-class enterprises. You can’t pay out ever-larger dividends without producing the ever-larger profits necessary to sustain that activity.
Not for long, anyway. It just doesn’t work. And so a lengthy track record of growing dividends is a great initial litmus test for business quality. Now, an initial litmus test isn’t the whole thing. It’s not the end-all, be-all. You still need to do that full research on a business.
Buffett has done his research here. And he has more than $8 billion invested in Verizon.
Buffett’s fashioned the Verizon investment into one of the largest single positions in Berkshire Hathaway’s common stock portfolio. Verizon’s corporate roots can be traced to the original AT&T and its Bell System, before it was forced to break up into what became known as Baby Bells in 1984.
Verizon’s existence dates back to the late 1800s. More than a century. Yet the company’s present and future might look even better and more secure than its storied past, and it’s likely going to prosper for another century. Buffett surely knows this, which is probably why he’s put so much capital to work here.
Buffett is okay with a low-tech flip phone, but most consumers are practically addicted to their smartphones and mobile data.
Buffett was reportedly using an old flip phone up until recently, but he’s very unique. Most consumers wouldn’t know what to do without their smartphone and the mobile data these devices need in order to effectively operate. You can basically throw a mobile phone bill in there with electricity and water bills.
It’s basically a utility at this point. And check this out. The average mobile phone bill in the US averages more than $100/month. What does that mean? It means significant recurring revenue and profit for the company.
Verizon is doing more than $130 billion in annual revenue. And their net income is coming in at more than $20 billion per year. What does that mean?
It means significant recurring and growing dividends for Verizon shareholders.
Verizon’s stock yields 5% right now. That’s serious income in a low-rate world. Being a master capital allocator, Buffett is able to take those huge dividends and reinvest them as he sees fit. And while us retail investors won’t have $8 billion invested in Verizon, we can still do the same thing as Buffett here – except at a smaller scale – and reinvest those big Verizon dividends as we see fit. It’s not just big, either.
This dividend is also growing. Verizon has increased its dividend for 17 consecutive years, with a 10-year dividend growth rate of 2.5%. Not big growth. This is an income play. But with a payout ratio of 46.8%, based on expected adjusted EPS for this fiscal year, this big dividend is easily covered and should continue to flow and slowly grow for years to come.
Buffett likes a good deal on his stocks. And this looks like a good deal.
The midpoint guidance for adjusted EPS for this coming fiscal year is $5.48. That puts the forward P/E ratio at 9.3. A single-digit P/E ratio in this market? That’s cheeeeeeeeeap. There’s also the P/CF ratio, which is 5.4. That’s very low. Even for this stock, which is often cheap. For context, the P/CF ratio has averaged 7.0 over the last five years.
So we’re below that level, which is already low. Verizon gives you the opportunity to cheaply invest alongside Warren Buffett and collect a 5% yield for your trouble. Getting paid to own the same equity as Buffett? What more can you ask for?
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
We’re Putting $2,000 / Month into These StocksThe goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.
Source: DividendsAndIncome.com