Warren Buffett's Investment Strategy: Berkshire Hathaway's Dividend Stock and Apple's Surprising Position

40.5% of Warren Buffett's $312 Billion Berkshire Hathaway Portfolio Is in These 2 Dividend Stocks | The Motley Fool

Looking for dividend growth stocks? It could pay to take a couple of pages out of Buffett's investing playbook. Under the leadership of CEO Warren Buffett, Berkshire Hathaway has paid a dividend to its investors just once (a $0.10 per share payout back in 1967). Instead, the company chooses to use its capital to invest in its wholly owned businesses and other companies, make new acquisitions, buy Treasury bonds, and buy back its own shares. With Berkshire's stock up more than 3,976,400% since Buffett purchased a controlling stake in the company in 1965, it's hard to argue with the Oracle of Omaha's capital-allocation strategy. The stock's gains across the stretch would have turned a $1,000 investment into more than $42.5 million today. Even though Berkshire doesn't pay a dividend itself, Buffett is a big fan of companies that return cash to shareholders through direct payouts. In fact, each of the company's 10 largest stock holdings pays a dividend -- and its portfolio is heavily weighted toward just a handful of dividend-paying stocks. Read on for a look at the two dividend stocks that account for 40.5% of Berkshire Hathaway's $312 billion stock portfolio. Jennifer Saibil: Apple (AAPL -0.70%) was recently inducted into Buffett's hallowed trio of stocks he said he'd never sell. As it turns out, he meant that he'd never sell the full position because he sold some Apple stock immediately after he said it. But that doesn't mean it's fallen out of Buffett's favor. It still accounts for roughly 28.3% of the entire Berkshire Hathaway portfolio. Like the other Buffett forever holdings, Apple is a dividend stock. It doesn't have a high yield -- just 0.45% at the current price, or well below the S&P 500 average of 1.3%. That's close to its lowest-ever yield, which is partially because Apple stock has been outstanding this year, gaining almost 15% year to date. The dividend demonstrates several things that are important to Buffett, regardless of the yield. It's a tangible sign of Apple's commitment to creating shareholder value and means management is prioritizing its cash position, which is paramount to operating a viable and growing business. Apple has a low payout ratio of only 14.9% because it's still in a robust growth mode and uses most of its earnings for innovation and operations. Apple has the global brand name and moat that Buffett loves, and being able to support that is a key element of sustaining its lead and edge. Apple fans are known to stick with the company's platform, trading up for new models when they're released. They're loyal to the Apple ecosystem, which is differentiated through its innovation, operating system, ease of use, and general excellence. Buffett said that Apple is an even better business than his other forever stocks, Coca-Cola and American Express (AXP -3.09%). It's not surprising that Apple is beating the market this year or is back in the top spot as the most valuable company on the stock market. It's exciting investors with its advancement in artificial intelligence, and the newest iteration of the iPhone is expected to be released this month. Even though it's already minted plenty of millionaires, there's a lot more to expect from Apple stock. Keith Noonan: Following some significant portfolio reshuffling in the second quarter, American Express overtook Bank of America to become Berkshire's second-largest overall stock holding. The Oracle of Omaha's company owns more than 151.6 million shares of AmEx stock, and the position accounts for 12.2% of its total stock holdings. The credit card-focused banking company has been serving up strong financial results, and its share price has risen roughly 58% over the last year. These big gains have also pushed down the company's dividend yield. That's not a problem for Berkshire because the company acquired the bulk of its AmEx shares at much lower prices, but is the stock still worthwhile for other income-seeking investors at today's prices? While the company's current yield of roughly 1% may not look like much, there's a good chance that shares purchased today will boast a much bigger yield down the line. American Express has increased its dividend payout by roughly 63% over the last three years and hasn't been letting up on the gas pedal when it comes to payout growth. With the payout increase it announced back in March, American Express hiked its dividend by 17%. Strong financial performance has paved the way for big payout growth, and there are good reasons to expect that profit expansion will continue to facilitate rapid dividend growth. American Express's revenue increased 8% year over year in the second quarter, and non-GAAP (adjusted) earnings per share rose 21%, compared to the prior-year period. The company added 3.3 million new card accounts in the quarter and recorded its 24th consecutive quarter of double-digit annual growth for card fees. For the full-year period, the company expects that it will grow sales between 9% and 11%, and its midpoint guidance calls for earnings growth of roughly 21%. The American Express brand and its financial products have continued to gain favor. And thanks to its focus on attracting a high-credit-quality customer base, the company also has the benefit of credit default rates that are best in class. While the stock's yield comes in below the S&P 500 index's average, it still looks like a worthwhile investment.

Warren Buffett Has Invested $2.9 Billion in His Favorite Stock This Year (Hint: Not Apple) | The Motley Fool

Under his leadership, Berkshire shares have returned 20% annually for nearly six decades, roughly doubling the gains in the S&P 500 (SNPINDEX: ^GSPC). Meanwhile, Buffett has amassed a personal fortune of $150 billion. Those accomplishments make him one of the best investors in American history. Today, Buffett reportedly manages about 90% of Berkshire's stock portfolio, including the largest positions, while fellow investment managers Todd Combs and Ted Weschler handle the rest. Buffett can also repurchase Berkshire stock when he believes it trades at a discount to its intrinsic value. With that in mind, Buffett made two important capital allocation decisions in the first half of 2024: Importantly, Buffett has repurchased Berkshire stock every quarter for six consecutive years, spending a cumulative total of $78 billion on buybacks during that period. He also has 99% of his net worth invested in the company -- I am not talking about Berkshire's portfolio but rather Buffett's personal wealth. That makes a compelling case for Berkshire being his favorite stock. Here's what investors should know about Apple and Berkshire. Apple has cultivated brand authority by pairing appealing hardware with proprietary software to create a user experience for which consumers willingly pay a premium. The average iPhone costs more than twice as much as the average Android smartphone, and Apple dominates the smartphone market in terms of revenue share. It is also the market leader in digital tablets and smartwatches outside of China and the fourth-largest personal computer manufacturer by shipment volume. However, the Apple innovation engine seems to be losing momentum. The company introduced the iPhone, iPad, and Apple Watch over a nine-year period that ended in 2015, but Apple has not launched a new viral product since AirPods hit the market in 2017. Furthermore, iPhones account for about 45% of total revenue, but iPhone sales have yet to top the record $71.6 billion from the first quarter of 2021. In short, Apple's long-term growth prospects in hardware are less than compelling, even though many analysts expect a massive upgrade cycle following the launch of Apple Intelligence, a suite of generative artificial intelligence (AI) features for iPhones and MacBooks expected in October. That means future revenue growth heavily depends on services like advertising, Apple Pay, the App Store, and iCloud storage. However, services account for less than 30% of total revenue, so that segment can only move the needle slowly. That's a problem because Apple stock is priced for robust growth. Shares currently trade at 33.6 times earnings. Meanwhile, Wall Street expects earnings to increase at 8.6% annually over the next three years. Those figures give a price/earnings-to-growth ratio (PEG ratio) of 3.9, a significant premium to the three-year average of 2.6. At that price, Apple looks overvalued. Personally, I would avoid this stock, and (like Buffett) I would consider trimming my position if I were sitting on profits. Berkshire Hathaway is the largest insurance company in the world as measured by float, a term referring to money an insurer holds between the time customers pay premiums and make claims. Due to disciplined underwriting, Berkshire has paid less than nothing to accumulate float, and Warren Buffett has invested those funds very effectively. Berkshire Hathaway had over $250 billion in fixed-income securities (bonds and Treasury bills), $285 billion in equity securities (stocks), and $40 billion in cash on its balance sheet as of the quarter ending in June. The sum of those invested assets has climbed steadily higher. In fact, Berkshire's book value per share -- a good yardstick for changes in intrinsic value -- increased at 11.3% annually over the last decade, outpacing the annual gain of 10.8% in the S&P 500. Buffett has also used insurance float to purchase dozens of subsidiaries that span the gamut of the U.S. economy, from energy and utilities to manufacturing and retail. Berkshire even owns freight railway Burlington North Santa Fe, which occupies a critical link in the domestic supply chain. Importantly, because those subsidiaries were generally vetted by Buffett, we can assume they met his standards for having a durable economic moat. That means Berkshire is a collection of above-average businesses that operate across a diverse range of industries. Those qualities make the company resilient during economic downturns. Since 1980, Berkshire stock has outperformed the S&P 500 by a median of 4.4 percentage points during recessions, according to Bespoke Investment Group. Wall Street expects Berkshire to grow operating earnings (which excludes investment gains and losses) at 18% annually through 2027. That estimate makes the current valuation of 23.5 times operating earnings look reasonable. Investors, especially those worried about an economic downturn in the near future, should consider buying a small position in this stock today.