Warren Buffett’s Best High-Yield Dividend Stocks – May 2016 Update

Analyzing Warren Buffett’s Top High-Yield Dividend Stocks

We analyzed each of Warren Buffett’s stock picks that pay a dividend, starting with his highest-yielding dividend stocks.

For each of Warren Buffett’s investments, we review what the business does and the potential reasons behind Berkshire Hathaway’s attraction to the company.

Our analysis is updated quarterly as new information about Berkshire Hathaway’s portfolio is released. The holdings below are sorted by dividend yield.

1: General Motors Company (NYSE:GM)

Percent of Warren Buffett’s Portfolio: 1.2%
Dividend Yield: 5.0%   Forward P/E Ratio: 5.4x   (as of 5/16/16)
Sector: Consumer Discretionary   Industry: Domestic Auto Manufacturers
Dividend Growth Streak: 2 years

General Motors Company (NYSE:GM) is one of biggest manufacturers of cars and trucks with nearly 10 million retail vehicle sales per year. Its product mix is balanced between cars (37% of sales), trucks (38%), and crossovers (25%).

The company owns the iconic North American brands Buick, Cadillac, Chevrolet, and GMC. Sales in North America account for about 55% of GM’s sales.

Overseas, General Motors sells its vehicles under the Holden, Opel, and Vauxhall brands and conducts most of its business in Europe (19% of sales) and South America (15%). However, China is GM’s second largest market and is number one by volume.

Berkshire Hathaway bought its initial stake in General Motors in early 2012. Warren Buffett is very familiar with the auto industry and has stakes in a handful of auto dealerships, so his involvement with GM isn’t overly surprising.

Buffett likes companies that have dominant shares of their markets, and GM is no exception. General Motors has the largest market share in North America and South America and is the second largest player in the Asia, Middle East, and Africa region.

Buffett probably sees substantial value in many of the company’s brands as well. From cheeseburgers to Chevrolet, Warren Buffett loves American icons.

As a value investor, Buffett has to like General Motors’ valuation, too. The company trades at a single-digit earnings multiple and has a dividend yield near 5%.

The stock looks cheap because investors are worried about the auto cycle rolling over, and many still have a sour taste in their mouths from General Motors’ bankruptcy and subsequent government bailout during the financial crisis.

However, the “new” GM is much stronger than its predecessor and has substantially improved its earnings power and financial health – the company has roughly $25 billion in cash on the balance sheet and generated over $4 billion in free cash flow last fiscal year.

Buffett’s favorite holding period is “forever,” and he probably sees plenty of room for General Motors to continue growing its earnings over time as it continues cutting costs and making investments in higher-margin areas.

As a matter of fact, GM’s management team hopes to improve pretax profit margins from under 7% in recent years to about 10% over the next five years. Management also believes global auto sales will rise from 85 million to 130 million by 2030, which would certainly boost GM’s earnigns.

While the auto industry is certainly cyclical, GM appears well-positioned to get through almost any environment and remain relevant for a long time to come.

We own shares of General Motors Company (NYSE:GM) in our Conservative Retirees dividend portfolio, and our initial thesis on the company can be read by clicking here.

GM was held by 84 investors tracked by Insider Monkey as of December 31, including Buffett. That figure was down from 88 on September 30. Harris Associates, an investment vehicle recently added to Insider Monkey’s database, owns a position of 78.56 million shares of GM as of March 31, which accounted for 4.64% of its portfolio.

2: Verizon Communications Inc. (NYSE:VZ)

Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 4.4%   Forward P/E Ratio: 12.9x   (as of 5/16/16)
Sector: Telecom   Industry: Diversified Communications Services
Dividend Growth Streak: 11 years

Verizon Communications Inc. (NYSE:VZ) is the largest wireless service provider in the United States and reaches over 98% of the country’s population with its 4G LTE network.

Wireless operations account for over 95% of Verizon’s operating profits and consist primarily of voice and data services and equipment sales.

At the end of 2015, Verizon Wireless had 112.1 million retail connections and generated sales of $91.7 billion.

Warren Buffett bought his initial stake in Verizon during the first quarter of 2014. Like many of the other companies owned by Berkshire Hathaway, Verizon enjoys strong brand recognition and operates in an industry characterized by high barriers to entry, inelastic product demand, and a relatively slow pace of change.

Building and maintaining a high quality communications network costs billions of dollars each year, and Verizon is one of the few companies with a large enough base of subscribers to be able to afford this cost each year.

Verizon Communications Inc. (NYSE:VZ) also owns the largest wireless network in the country, which allows it to reach more customers than its rivals and provide better service.

While industry pricing plans and contracts are constantly evolving, the essential nature of telecom services has remained steady. Customers need to communicate regardless of how the economy is doing, resulting in steady demand and predictable cash flows.