Warren Buffett is best known for his great stock picks over the past decades. His ability to consistently generate positive returns for investors has given him somewhat of a legendary status in the finance world. Yet one part that often slips under the radar are his dividend picks. Some of his largest holdings are in companies like Coca-Cola and Verizon, both of which pay out regular dividends. As a result, here are two things I’ve noted from his approach to owning dividend stocks.
Targeting reliable dividend payers
The first point that stands out to me is the type of dividend stocks that Warren Buffett owns. These aren’t ultra-high-yield stocks that have volatile earnings, such as commodity firms. Rather, they are mostly in the consumer staples or consumer discretionary sectors. The benefit of this is that although the yields might not be very high, the dividends are steady and consistent. As a long-term investor, this is appealing.
For example, take Verizon. The telecommunications business has a dividend yield at the moment of 5.03%. The dividend growth over the past three years has been 6.46%. In fact, it has grown the dividend for the past 17 years. For me, this is the type of company I’d like to include in my income portfolio.
When I look at other examples of stocks owned by Buffett (via his company Berkshire Hathaway), the same story often appears. I think it’s a clear theme of his to target this type of stock.
Helping to stay in the green
The second point I’ve picked up on from Warren Buffett was following his comment, “Rule No.1: never lose money. Rule No.2: never forget rule No.1”.Â
The great thing with dividend stocks is that it provides me with income that can help to offset movements on the share price. It can either add to my profits or compensate for a loss, but either way it helps me try to stick to the first rule of not losing money!
For example, I might have bought a stock with a dividend yield of 5% and held it for two years. Over this time, the share price might have fallen by 7%. Yet due to the 10% overall yield from income, my overall net position if I sold the stock would be +3%. This is also a helpful point to note if I think that a stock market crash is coming. Dividend stocks can help to provide income during a period where share prices are falling.
Learning from Warren Buffett
Taking onboard the points on reliable dividend payers and using the income to offset share price movements should help me going forward. Earlier this week, I wrote about two stocks that I think fit the bill. These are Direct Line Group and National Grid. I’m thinking about buying shares in both companies at the moment, explained in more detail here.