Warren Buffett’s investment philosophy centers around picking solid stocks at opportune moments and sticking with them as long as they remain robust companies. While everyday investors may not have Berkshire Hathaway’s vast resources, they can still follow Buffett’s lead by seeking out dividend-paying stocks with a history of consistent increases in payouts.
Despite Berkshire Hathaway itself not paying dividends, a substantial portion of its portfolio comprises stocks that do. Surprisingly, just two stocks account for 57.7% of Berkshire’s stock portfolio at recent prices, showcasing Buffett’s strong inclination towards dividend payers.
Buffett’s Big Bet on Apple
Buffett, at the helm of Berkshire since 1965, made one of his most significant investments in 2016 when Berkshire initiated a substantial stake in Apple (NASDAQ: AAPL). This move has since become Berkshire’s largest holding, with Apple’s stock price surging by an impressive 627% since Berkshire disclosed its initial stake. Additionally, the quarterly dividend payout from Apple has risen by approximately 68% over the same period.
At recent prices, Berkshire’s Apple holdings stand at a staggering $181 billion, constituting about 48% of the equity portfolio. Although the stock offers a modest 0.5% yield, Buffett’s accumulation of around 915 million shares makes quarterly payouts substantial.
Berkshire’s holdings in Apple are set to deliver $220 million worth of dividend payments in February, with the highly profitable tech giant generating nearly $100 billion in free cash flow over the past 12 months. Despite slow iPhone sales growth, Apple’s extensive user base of over 2 billion active devices, coupled with high-margin services, contributed to a 13% increase in earnings per share in its fiscal fourth quarter ending September 30.
Bank of America: Dull Yet Reliable
Buffett’s trust in the U.S. economy’s long-term growth is evident in Berkshire’s second-largest holding—Bank of America (NYSE: BAC). Holding over 1 billion shares, or 9.3% of the equity portfolio, Bank of America represents Buffett’s confidence in the resilience of cyclical businesses during economic growth.
Bank of America witnessed a faster rise in interest from loans in 2023 compared to the interest paid on its substantial deposit base. This improvement in net interest margin contributed to an 11% year-over-year increase in third-quarter earnings per share.
Investors looking to emulate Buffett’s strategy can anticipate potential profits and a growing dividend from Bank of America, reflecting Buffett’s confidence in the enduring strength of the U.S. economy.
As of recent prices, Bank of America (BofA) shares present an attractive 2.8% dividend yield, offering investors the potential for a significantly higher yield on their initial investment in the coming years. While the bank maintained its dividend in 2020, it has still seen a robust 60% increase over the past five years.
Despite the consistent dividend growth in recent years, Bank of America managed to meet its dividend obligations over the last 12 months with only 20.7% of the free cash flow generated by its lucrative banking operations. This indicates ample room for further dividend increases in the future. Considering these factors, investing in BofA stock now with a long-term perspective appears to be a prudent decision.
Why Bank of America Stands Out:
- Yield and Growth Potential: With a current dividend yield of 2.8%, BofA shares provide investors with an immediate income stream. Moreover, the potential for a higher yield on the original investment in the years ahead adds an appealing growth dimension.
- Dividend Stability: Despite the challenges of 2020, BofA held its dividend steady, showcasing resilience. The 60% growth in dividends over the past five years demonstrates a commitment to rewarding shareholders.
- Free Cash Flow Coverage: BofA managed its dividend obligations efficiently, using only 20.7% of its free cash flow generated by its robust banking operations. This suggests a strong financial position and significant room for future dividend increases.
Long-Term Investment Opportunity:
Considering the steady performance, dividend growth, and financial stability, investing $1,000 in Bank of America for the long run appears to be a strategic move. The bank’s ability to meet its dividend commitments and its potential for substantial future increases position it as an appealing choice for investors seeking both income and growth.
