There are plenty of good reasons to buy a dividend stock, and who's better to learn from than Warren Buffett himself. As of this writing, Berkshire Hathaway owns 30 dividend-paying stocks in a variety of industries. Here's what Warren Buffett looks at when deciding which dividend stocks to purchase, and how you can apply this information to your own portfolio.
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Buffett's dividend stocksThere's no way of knowing Buffett's entire process of picking stocks, but we do know that there are some things he likes to see. Just to name a few, Buffett looks for:
- Little or no debt
- A strong history of growth, in terms of profits and revenue
- Shareholder-friendly management that prioritizes dividends and share buybacks
- A relatively low payout ratio (dividend as a percentage of earnings)
Perhaps most importantly, Buffett looks for a "wide economic moat." This refers to an identifiable competitive advantage that should allow the company to thrive for decades to come. For example, Coca-Cola has a world-class distribution network and one of the most valuable brand names in the world. The brand name gives the company pricing power (this is why we pay more for Coca-Cola than generic soda) and the distribution network allows the company to get its products where they need to be in a more efficient manner than competitors.
How to use this informationNow, I'm not saying that you should buy these specific stocks for your portfolio. Rather, my point is that there is a clear "type" of dividend stock that makes a good long-term investment, and more importantly, many kinds of dividend stocks that have no place in a low-risk long-term stock portfolio.
Specifically, you'll notice that Buffett doesn't go after the highest-yielding dividend stocks -- far from it. For example, there are plenty of oil companies that pay more than Suncor Energy's 3.14% yield, especially after the recent drop in oil stock prices. However, Suncor has a diverse revenue stream, cost advantages over many of its peers, and a sound management team -- all of which are much more important than the dividend yield itself.
With this in mind, here are the 10 highest-yielding stocks in Berkshire Hathaway's portfolio, and a bit about why Buffett likes each one.
The article Warren Buffett's 10 Highest-Paying Dividend Stocks originally appeared on Fool.com.
Matthew Frankel owns shares of Berkshire Hathaway. The Motley Fool owns shares of and recommends Berkshire Hathaway. The Motley Fool recommends Coca-Cola. 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.
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