One common theme of Warren Buffett’s Berkshire Hathaway is dividends. While not every Berkshire stock offers a payout, dividends have become an integral part of the investment thesis for many stocks picked by Buffett and his team.
Admittedly, Buffett’s company has not invested in some of these stocks in decades, indicating they make better holds than buys in today’s market. Still, dividend stocks like Procter & Gamble (P&G) (PG 2.38%), Ally Financial (ALLY 3.82%), and Chevron (CVX 0.75%) could still generate significant returns for income investors. Here’s a look at each company.
Procter & Gamble
Although Berkshire has sold most of its stake in P&G, investors focused almost exclusively on income might still want to take an interest in the company. Procter & Gamble pays shareholders just over $3.65 per share annually.
Still, it is likely not the 2.4% cash return that keeps this in Berkshire’s portfolio. Nor is it the valuation or growth, as paying 26 times earnings seems expensive for a company that increased its revenue by only 1% in its fiscal 2023’s first quarter (ended Sept. 30). In fact, that may have led to some sell-offs of P&G stock in past years.
Instead, it is probably the consistency. As a Dividend King, Procter & Gamble has built a 66-year track record of annual dividend increases. That trend will likely continue. In fiscal Q1, it generated $3.4 billion in adjusted free cash flow, well above the $2.3 billion cost of the payout during that period.
Moreover, it has built this dividend on what looks like a narrow competitive moat. Fortunately, it widened that moat through brand marketing. Offerings such as Tide detergent, Pampers diapers, and Oral-B toothpaste are well established, and this has engendered a high degree of brand loyalty. That devotion should support both the dividend and the stock over time.
Ally Financial
One of Berkshire’s more unique dividend stocks is Ally Financial. Investors will earn $1.20 per share annually from the dividend, returning 4.7% for investors who buy right now. And while it is too early to expect payout hikes, the company has increased its annual payout every year since it introduced the dividend in 2016.
That dividend cost Ally $298 million in the first nine months of 2022. Still, that is only a tiny fraction of its operating cash flows for the quarter, which came in above $5 billion.
Ally also stands out by merging fintech with traditional banking. It is a fully online bank, offering checking and savings accounts, as well as loan and mortgage products. The company previously branded itself as GMAC, the auto financing arm spun off of General Motors. To this end, a large portion of its portfolio is auto loans.
Admittedly, the 1% net revenue growth and nearly 60% decline in net income for Q3 will likely not excite investors. Nor will they like the near 50% drop in the stock price over the last year.
Nonetheless, they may feel more like buying when they notice that its P/E ratio has fallen to 4. When considering the dividend’s size and growth trajectory, many investors might start to consider Ally Financial a buy.
Chevron
Dividends have long motivated Berkshire to buy specific stocks, and Chevron’s income production has likely become too compelling to ignore in recent years. Its investors currently receive $5.68 per share annually in payouts, a cash return of 3.3%.
Moreover, it has maintained a streak of annual payout hikes for 35 years. And since it has typically increased that payout in late January, dividend returns will likely rise again soon.
Even with its streak of increases, the payout appears safe. In the third quarter of 2022, it generated more than $12 billion in free cash flow. Over the same time frame, the payout cost the company less than $3 billion, making it (and subsequent hikes) easily affordable.
Additionally, Chevron provides products with enduring demand, another attribute that appeals to Buffett. But despite a recent emphasis on renewables, nearly all of its revenue comes from oil and natural gas. That should benefit investors as 68% of all U.S. energy use involves those two sources, according to the Energy Information Agency.
Furthermore, even after rising 45% over the last 12 months, Chevron still sells for less than 10 times earnings. This increases the likelihood that income investors will also benefit from a rising stock price — an attribute that could draw more investors to Chevron’s stock.
Ally is an advertising partner of The Ascent, a Motley Fool company. Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.