Dividend stocks are usually the cornerstone of successful investing portfolios. That’s because they bring an abundance of advantages to the table that their non-dividend-paying counterparts simply can’t offer.
Aside from the fact that dividend stocks have handily outperformed non-dividend-paying stocks over the long run, the first thing to note is that dividend stocks are usually profitable and have time-tested business models. Put in another context, companies wouldn’t be inclined to share a percentage of their income with shareholders if…
their management teams didn’t foresee continued profitability and growth.
Furthermore, regular payouts can help calm skittish investors and hedge against inevitable stock market corrections, as well as be reinvested into more shares of dividend-paying stock via a dividend reinvestment plan (DRIP). DRIPs are how the smartest money managers in the world generate long-term wealth for their clients.
Warren Buffett loves dividend income
The importance of dividend payouts isn’t lost on the most revered buy-and-hold investor of our generation, Warren Buffett. The CEO of conglomerate Berkshire Hathaway (NYSE:BRK-B)(NYSE:BRK-A) is currently generating dividend income from roughly two-thirds of the nearly four dozen companies in which he has an investment stake. By as early as next year, Berkshire Hathaway might be able to generate north of $5 billion annually in dividend income.
Whereas most of Buffett’s dividend stocks offer modest yields that are more or less in line with the average yield of the broad-based S&P 500, a closer inspection of Berkshire’s holdings reveals three high-yield dividend stocks that are currently yielding at least 4%. That’s more than double what investors could pocket in annual income from a 10-year Treasury note from the U.S. government.
Additionally, these high-yield stocks also happen to be three of Buffett’s 14 largest holdings by total market value. As such, it’s not a stretch to consider these established businesses his favorite high-yield stocks.
Of course, you’re about to see that a high yield isn’t necessarily a good thing — even for the Oracle of Omaha.
Kraft Heinz: 6% yield
One of the biggest dangers of dividend investing is yield-chasing. Since yield is simply a function of payout relative to share price, a struggling business with a flailing share price can present with an exceptionally enticing yield. That’s exactly what’s happened with snack and beverage company Kraft Heinz (NASDAQ:KHC), which has lost 38% on a year-to-date basis, inclusive of dividend payouts, and seen its payout soar to 6%.
When Berkshire Hathaway and 3G Partners teamed up to buy Heinz in 2013, they saw a company with well-known food brands that, in many instances, had little trouble engaging consumers. However, Heinz clearly overpaid for Kraft Foods in 2015, which is something that the Oracle of Omaha admitted when speaking with shareholders during the company’s latest annual shareholder meeting.
Despite Kraft Heinz’s recent struggles, Buffett has no intention of selling Berkshire Hathaway’s 325.6 million share stake in Kraft Heinz, worth about $8.8 billion. However, this decision has more to do with Buffett not wanting to further pressure Kraft Heinz’s share price by trying to dispose of Berkshire’s 26.7% stake than confidence in the company’s ability to turn itself around. Kraft Heinz’s balance sheet is currently bogged down by $29.8 billion in long-term debt and $36 billion in goodwill, even after writing down $15.4 billion of the value of various brand-name products earlier this year. The company needs capital to reignite growth in its brands, but is busy tightening its belt to reduce its expenditures.
Kraft Heinz may be a significant income generator for Buffett, but it’s not the strongest dividend stock by any means…
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