Warren Buffett’s Berkshire Hathaway outperformed the S&P 500 by 11.1% per year from 1965-2016, generating an overall gain of 1,972,595% compared to the market’s total return of 12,717%.

 

It’s no wonder why investors closely monitor Warren Buffett’s portfolio. He is arguably the greatest investor of all time, and his best investment advice can be seen here.

 

While Berkshire Hathaway itself does not pay a dividend because it prefers to reinvest all of its earnings for growth, Warren Buffett has certainly not been shy about owning shares of dividend-paying stocks, and we will analyze each of Buffett’s dividend stocks in this article.

 

A dividend is often the sign of a financially healthy and stable business that is committed to rewarding shareholders. These are some of the qualities Warren Buffett looks for when he invests.

 

February 2017 Berkshire Hathaway Portfolio Update

On Tuesday, February 14, 2017, new information was released about Berkshire Hathaway’s portfolio. While most quarters are fairly uneventful for the Oracle of Omaha, Buffett and his team were busy during the fourth quarter of 2016.

 

Berkshire Hathaway completely exited its stakes in Deere (DE) and Kinder Morgan (KMI), which had both been trimmed in recent quarters.

 

Warren Buffett also sold 99% of Berkshire’s stake in Verizon (his remaining position is only worth $50,000) and further reduced his position in Wal-Mart by 89% (he has likely exited Wal-Mart entirely by now).

 

Buffett wasn’t only busy selling stocks last quarter. He initiated new positions in three dividend-paying stocks: Sirius XM Radio (SIRI), Monsanto (MON), and Southwest Airlines (LUV).

 

He now owns four airline stocks after buying three of them during the third quarter of 2016 (Delta Air Lines, United Continental Holdings, and American Airlines), and he more than doubled his position in each of these airline stocks during the fourth quarter.

 

Buffett now owns over 7% of each airline’s total common stock!

 

However, perhaps the biggest headline of the quarter was Berkshire’s increased bet on Apple (AAPL). The firm increased its stake by nearly 300%, bringing its position to be valued at more than $6.5 billion.

 

At the end of December 2016, Warren Buffett owned a total of 44 publicly-traded stocks. Interestingly enough, 34 of these holdings pay a dividend, and several of them are high dividend stocks with yields in excess of 4%.

 

Let’s take a closer look at Warren Buffett’s recent trades and what he might be thinking.

 

Notable Additions

Airlines: Warren Buffett started buying airlines during the third quarter of 2016, accumulating shares of Delta Airlines, United Continental, and American Airlines. He added Southwest Airlines to Berkshire’s portfolio last quarter and significantly increased his position in each of his three other airlines as well.

 

In total, airline stocks now account for more than 6% of Berkshire Hathaway’s portfolio, and Buffett’s bets are spread rather evenly across his four airline holdings (each ranges from 1.4% to 2.0% of the total portfolio’s value).

 

Buffett’s investment in airlines is a rather curious move. Airline businesses are notoriously volatile based on fuel prices and travel demand, and their capital-intensive operations require high amounts of financial leverage. Many have gone bankrupt over the years. According to Bloomberg, Warren Buffett himself even said the following about airlines in 2001:

“Now if I get the urge to invest in airlines, I call an 800 number and I say: Hello, my name is Warren, and I’m an air-o-holic.”

Why now? Well, as value-oriented managers, they could have been attracted to several timely factors noted in the Bloomberg article linked above. For one thing, revenue per available seat mile has tended lower for the last two years, potentially finding a cyclical bottom. If this trend is viewed as cyclical rather than secular, it could provide a buying opportunity for long-term investors.

 

Warren Buffett High Dividend Stocks

 

In part due to the slump in passenger revenue, airline stocks have seen their valuations tumble over the last two years, especially relative to the S&P 500. Bloomberg notes that “the four largest airlines in the U.S. trade, on average, for less than 8 times their trailing 12-month earnings, compared with the S&P 500 index’s multiple of 20.” While their stock prices have rebounded somewhat since the third quarter of 2016, airline stocks still trade at a meaningful discount to the broader market. Perhaps there is value in this industry.

 

Warren Buffett High Dividend Stocks

 

Buffett made some additional comments about airlines in 2013:

“The airline industry has situation where have very, very, very low incremental cost per seat with enormous fixed costs. The temptation to sell that last seat at a very low price is very high and sometimes it’s very hard to distinguish between that seat and the last seat. It’s labor-intensive and capital-intensive and largely commodity-type business. As Bill Miller points out, it’s been a death trap for business since Orville took off. If it ever gets down to one airline it will be a wonderful business and the question will be if having gotten down to relatively few through bankruptcy the question will be whether it is a good business yet. I don’t know the answer but I’m skeptical.”

The last part of his quote is most interesting given the consolidation that has in fact taken place. The market share of the four largest carriers increased from 65% to 84% between 2010 and 2015.

 

Warren Buffett High Dividend Stocks Airlines

Source: Alaska Air Investor Presentation

 

Perhaps Buffett believes airline stocks are unloved (and thus meaningfully undervalued) stocks because of their volatile and unprofitable histories, but this time really is different thanks to the industry’s meaningful consolidation.

 

Furthermore, Buffett has been trimming or exiting positions that benefit from higher oil prices (e.g. Suncor, Kinder Morgan). Low oil prices are great for airlines because fuel is a major operating cost. Perhaps Buffett thinks oil prices will stay lower for longer than investors expect.

 

Buffett knows way more about this industry than I do, and I still consider it to be outside of my circle of competence. The dividend yields are also quite low for airline stocks.

 

Apple (AAPL): Apple now represents 4.5% of Warren Buffett’s portfolio after Berkshire more than tripled its stake in the company last quarter. Apple’s wildly popular global brand, gobs of cash, and captive consumer base give Berkshire enough confidence to place a multibillion dollar bet on the company’s future. However, with smartphone growth slowing and the law of large numbers working against the company, Apple has a lot to prove. Perhaps Buffett believes these concerns are more than priced in. After all, Apple’s stock trades at a forward P/E multiple of 15, representing more than a 10% discount to the S&P 500’s multiple.

 

Sirius XM Radio (SIRI): Sirius is a satellite radio provider controlled by media mogul and billionaire John Malone. Buffett is also a shareholder of Liberty Media, which is controlled by Malone and company as well, and is quite familiar with different media businesses. Sirius XM only began paying quarterly dividends in November 2016 and yields less than 1%, reducing its appeal for most dividend growth investors. Sirius has a customer base of around 30 million subscribers and dominates the exclusive radio programming market with leading content. Its radios are available in 75% of new cars and 28% of used cars sold. Roughly one-third of America’s car fleet has a factory-installed satellite radio. Warren Buffett loves market leaders with predictable business models, captive consumers, and opportunities for long-term growth, and Sirius XM seems to fit the bill.

 

Monsanto (MON): Monsanto is a seed maker that now accounts for roughly 0.6% of Berkshire Hathaway’s portfolio and sports a dividend yield of 2%. The company has increased its dividend each year since it started paying one in 2001 and has compounded its dividend by 13.6% annually over the last five years.

 

Before you get too excited, investors should note that Monsanto agreed to be acquired by Bayer AG for $66 billion last year. This is similar to a merger arbitrage play, a strategy Buffett used frequently in his early investing days. Essentially, he is betting that the merger will go through, providing him profits as Monsanto’s current stock price ($109) ultimately closes the gap with Bayer’s acquisition price ($128).

 

I don’t have any insights into the likelihood of this deal closing, once again keeping me on the sidelines and proving Buffett’s vastly larger circle of competence compared to my own!

 

Notable Reductions

Warren Buffett completely sold out of his positions in Deere (DE) and Kinder Morgan (KMI). He had been trimming each holding for the last couple of quarters. He also exited 89% of his remaining stake in Wal-Mart (WMT), which he had also been reducing already, and sold 99% of his (relatively small) position in Verizon (VZ).

 

Wal-Mart (WMT): Buffett will likely finish exiting his position in Wal-Mart before the first quarter of 2017 is over. Wal-Mart is finding earnings growth to be difficult to come by as it faces higher costs (e.g. rising minimum wage pressure and soaring healthcare costs) and stiff competition from online retailers. The business has struggled to replicate Amazon’s success with its own e-commerce site. Buffett’s action here is a fairly clear signal that he thinks many brick-and-mortar retailers will remain challenged by the online world for many years to come. I share his concerns and avoid investing in almost all consumer retail focused businesses.

 

Kinder Morgan (KMI): Warren Buffett initiated a position in Kinder Morgan during the fourth quarter of 2015, shortly after the company shocked investors with a large dividend cut. It’s unusual for Buffett, a notorious long-term investor, to sell a stock so shortly after acquiring a position. KMI’s stock is up about 50% from its low during the fourth quarter of 2015, and perhaps this move reflects Berkshire’s pessimistic stance on certain parts of the energy value chain relative to the market’s increased expectations. My preference is to avoid almost all master limited partnerships (MLPs) because of the severe risks many of them possess.

 

Deere (DE): Berkshire trimmed its stake in Deere by 3% during the third quarter of 2016 and completely exited the stock in the fourth quarter. Deere had accounted for roughly 1.4% of Buffett’s total portfolio value. Deere’s stock surged following Trump’s election, but Buffett might not be feeling as optimistic about farm and construction machinery demand picking up anytime soon. Farmer income is expected to decline for a fourth straight year in 2017, making it harder to justify buying new machinery.

 

Verizon (VZ): Warren Buffett first bought shares of Verizon during the first quarter of 2014, and the stock was 0.6% of Berkshire Hathaway’s portfolio prior his selling last quarter. The wireless market appears to have become more competitive over the last year when looking at the subscriber growth lower-cost rivals Sprint and T-Mobile have enjoyed. Perhaps Buffett thinks that growth will remain a challenge for Verizon and that its network is only incrementally better than its competitors’ networks today. It’s hard to say, but Verizon’s dividend remains safe.

 

Warren Buffett’s Investment Strategy

Warren Buffett has evolved as an investor since launching his original partnership in 1956. Back then, Warren Buffett’s portfolio was much smaller in size and allowed him to pursue the greatest inefficiencies he could find in the market almost irregardless of the stock’s market cap. He focused intensely on finding stocks trading at cheap valuations.

 

Buffett was not afraid to make a single position account for more than 25% of his portfolio and stated that he would be comfortable investing up to 40% of his net worth in a single security if the probabilities were deemed to be extremely in his favor, limiting risk.

 

Warren Buffett’s portfolio remains concentrated today, and his largest position accounts for just less than 20% of Berkshire Hathaway’s portfolio. The idea behind running a concentrated portfolio is that there are relatively few excellent businesses and investment opportunities in the market at any given time, and owning too many positions reduces the impact from your few best ideas.

 

Importantly, Warren Buffett’s investment strategy has always been focused on the concept of staying within one’s circle of competence. Buffett has said that “risk comes from not knowing what you’re doing.”

 

In other words, never invest in a business or industry that is too hard for you to understand. The reality is, most investment opportunities fall outside of our circle of competence and should be ignored. Playing to your strengths is one of several tips to pick safer dividend stocks.

 

Since the days of his initial partnership, Buffett’s strategy has evolved to concentrate more on buying up wonderful businesses at reasonable prices rather than digging through the bargain bin for “cheap” stocks. He looks for companies that have strong economic moats and numerous opportunities for growth.

 

When Warren Buffett makes an investment, he has said that his favorite holding period is “forever.” The idea is to buy excellent companies with solid long-term growth prospects and let them compound over the long run.

 

Not surprisingly, our dividend investment philosophy shares many similarities with Warren Buffett’s. For that reason, it’s helpful to review the high-yield dividend stocks owned by Berkshire Hathaway.

 

Warren Buffett’s Portfolio of Dividend Stocks

The table below contains all of the dividend-paying stocks owned by Warren Buffett and Berkshire Hathaway.

 

Data on Warren Buffett’s holdings is updated daily and can be downloaded by clicking on the PDF and Excel icons located above the table.

 

Below the table, you can read our analysis of each of Warren Buffett’s dividend stocks.

 

Warren Buffett: Top Dividend Stocks

TickerCompany NameSectorIndustryCategoryMarket Cap ($M)Market CapSafety ScoreGrowth ScoreYield ScoreDividend YieldDividend Growth StreakEPS Payout Ratio5yr Median EPS PayoutFCF Payout Ratio5yr Median FCF PayoutEx-Dividend DatePay Date1yr Dividend Growth3yr Dividend Growth5yr Dividend Growth10yr Dividend GrowthAnnual Dividend ($)Dividend Payment ($)Payment FrequencyP/E RatioFree Cash Flow YieldEnterprise Value / SalesEnterprise Value / EBITPrice-to-Book RatioGross MarginOperating MarginProfit MarginFCF MarginReturn on Equity5yr Median ROEROIC5yr Median ROIC1yr Sales Growth5yr Sales CAGR1yr EPS Growth5yr EPS CAGRCurrent RatioDebt to CapitalDebt to CapitalDebt to EquityDebt to EquityNet Debt to EBITNet Debt to EBITEBIT / InterestEBIT / Interest1yr Total Return5yr Total Return CAGR
AAL American Airlines Group, Inc. Transportation Airlines 0.93 21,591 Large: $10B to $100B 39 55 13 1.0 < 5 Years 8 24 02/09/2017 2017-02-27 0 0.4 0.1 Quarterly 8.7 4.0 1.0 7.4 5.59 33.3 13.2 6.7 2.3 70 70.7 10.2 16.0 2 11 -88 0.7 0.9 Very High Debt: > 0.7 6.4 Very High Debt: > 2.0 3.3 Above Average Risk: 2.0 to 5.0 5.3 Average Risk: 4x to 8x -3 42
AAPL Apple Inc. Technology Mini Computers 1.25 735,265 Mega: > $100B 96 90 32 1.6 5+ Years 27 27 23 22 02/09/2017 2017-02-16 10 10 2.3 0.6 Quarterly 16.8 7.0 3.5 12.9 5.58 39.1 27.8 21.2 24.6 35 35.4 22.4 28.1 3 15 2 16 1.2 0.4 Average Debt: 0.3 to 0.5 0.7 Average Debt: 0.5 to 1.0 0.5 Low Risk: < 1.0 Very Low Risk: > 15x 36 13
AXP American Express Company Finance Miscellaneous Services 1.19 70,374 Large: $10B to $100B 69 82 32 1.6 5+ Years 22 20 17 13 01/04/2017 2017-02-10 8 11 11 8 1.3 0.3 Quarterly 13.8 9.4 2.7 11.4 3.45 0.0 0.0 17.6 20.3 26 26.4 8.0 7.5 -4 1 -1 7 0.7 High Debt: 0.5 to 0.7 2.7 Very High Debt: > 2.0 2.7 Above Average Risk: 2.0 to 5.0 Very Low Risk: > 15x 31 8
BK Bank Of New York Mellon Corporation (The) Finance Major Regional Banks 1.29 48,023 Large: $10B to $100B 57 50 32 1.6 5+ Years 23 27 14 19 01/27/2017 2017-02-10 6 7 8 -2 0.8 0.2 Quarterly 14.7 11.1 -2.3 -7.6 1.23 0.0 0.0 22.1 35.0 9 7.2 5.5 4.5 2 0 35 9 0.4 Average Debt: 0.3 to 0.5 1.0 High Debt: 1.0 to 2.0 -17.7 Net Cash Very Low Risk: > 15x 26 17
COST Costco Wholesale Corporation Consumer Discretionary Discount Retail 0.91 72,534 Large: $10B to $100B 99 96 16 1.1 10+ Years 33 34 32 116 02/08/2017 2017-02-24 13 13 13 13 1.8 0.5 Quarterly 30.7 3.4 0.6 19.2 5.73 13.3 3.1 2.0 0.5 19 18.7 14.5 12.9 6 6 -6 10 0.9 0.2 Low Debt: 0.1 to 0.3 0.4 Low Debt: 0.2 to 0.5 -0.2 Net Cash 29.0 Very Low Risk: > 15x 10 17
DAL Delta Air Lines, Inc. Transportation Airlines 0.83 34,585 Large: $10B to $100B 81 88 36 1.8 < 5 Years 13 14 02/22/2017 2017-03-17 50 78 0.8 0.2 Quarterly 7.9 11.6 1.0 5.6 2.74 31.7 17.5 11.0 10.2 35 35.6 23.7 23.7 0 2 -31 42 0.5 0.3 Average Debt: 0.3 to 0.5 0.6 Average Debt: 0.5 to 1.0 0.6 Low Risk: < 1.0 17.9 Very Low Risk: > 15x -5 39
FOXA Twenty-First Century Fox, Inc. Consumer Discretionary Movie & TV Production & Distribution 1.34 58,545 Large: $10B to $100B 76 85 17 1.1 < 5 Years 22 17 18 27 03/13/2017 2017-04-19 10 -57 14 11 0.4 0.2 Semi-Annual 19.2 6.2 2.6 11.4 3.75 37.3 21.9 10.1 10.2 20 20.3 8.9 10.0 4 2 35 6 2.3 0.6 High Debt: 0.5 to 0.7 1.3 High Debt: 1.0 to 2.0 2.4 Above Average Risk: 2.0 to 5.0 5.5 Average Risk: 4x to 8x 11 16
GE General Electric Company Conglomerates Diversified Operations 1.19 259,612 Mega: > $100B 56 25 68 3.2 < 5 Years 61 93 68 32 02/23/2017 2017-04-25 1 6 9 -1 1.0 0.2 Quarterly 33.4 2.5 18.0 3.35 29.3 13.6 6.6 -2.4 12 6.9 5.2 2.9 -1 -3 5 -6 1.9 0.6 High Debt: 0.5 to 0.7 1.8 High Debt: 1.0 to 2.0 2.6 Above Average Risk: 2.0 to 5.0 3.4 High Risk: 2x to 4x -1 12
GHC Graham Holdings Company Consumer Discretionary Schools 0.85 3,215 Mid: $2B to $10B 87 55 11 0.9 < 5 Years 16 9 10 9 04/11/2017 2017-05-09 -99 -12 -5 5.1 1.3 Quarterly 19.4 8.2 1.0 8.5 1.32 52.4 12.2 6.8 10.6 6 2.0 5.8 1.7 2 -7 -27 15 2.3 0.2 Low Debt: 0.1 to 0.3 0.2 Low Debt: 0.2 to 0.5 -2.1 Net Cash 8.6 Low Risk: 8x to 15x 26 22
GM General Motors Company Auto, Tires, Trucks Domestic Auto Manufacturers 1.28 51,574 Large: $10B to $100B 76 73 80 4.4 < 5 Years 25 26 33 -22 03/08/2017 2017-03-24 10 1.5 0.4 Quarterly 5.8 0.7 11.7 1.18 12.8 5.7 5.7 -6.1 21 21.0 9.3 9.3 11 2 -69 6 0.9 0.6 High Debt: 0.5 to 0.7 1.9 High Debt: 1.0 to 2.0 6.3 High Risk: > 5.0 16.7 Very Low Risk: > 15x 17 10


 

Analyzing Warren Buffett’s Top High-Yield Dividend Stocks

We analyzed each of Warren Buffett’s stock picks that pay a dividend, starting with his highest-yielding dividend stocks.

 

For each of Warren Buffett’s investments, we review what the business does and the potential reasons behind Berkshire Hathaway’s attraction to the company.

 

Our analysis is updated quarterly as new information about Berkshire Hathaway’s portfolio is released. The holdings below are sorted by dividend yield.

 

1: Verizon (VZ)

Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 4.8%   Forward P/E Ratio: 12.4x   (as of 2/15/17)
Sector: Telecom   Industry: Diversified Communications Services
Dividend Growth Streak: 12 years

 

Verizon is the largest wireless service provider in the United States and reaches over 98% of the country’s population with its 4G LTE network.

 

Wireless operations account for over 95% of Verizon’s operating profits and consist primarily of voice and data services and equipment sales.

 

At the end of 2015, Verizon Wireless had 112.1 million retail connections and generated sales of $91.7 billion.

 

Warren Buffett bought his initial stake in Verizon during the first quarter of 2014, but he sold 99% of his position during the fourth quarter of 2016.

 

Berkshire Hathaway might have initially liked Verizon because the company enjoys strong brand recognition and operates in an industry characterized by high barriers to entry, inelastic product demand, and a relatively slow pace of change.

 

Building and maintaining a high quality communications network costs billions of dollars each year, and Verizon is one of the few companies with a large enough base of subscribers to be able to afford this cost each year.

 

Verizon also owns the largest wireless network in the country, which allows it to reach more customers than its rivals and provide better service.

 

While industry pricing plans and contracts are constantly evolving, the essential nature of telecom services has remained steady. Customers need to communicate regardless of how the economy is doing, resulting in steady demand and predictable cash flows.

 

Why is Buffett exiting his position? You can never be sure (i.e. maybe he has a better idea), but he could be concerned about future growth opportunities in the wireless market and the increased competitiveness of low-cost rivals’ networks (e.g. Sprint, T-Mobile).

 

Read More: Our Analysis of Verizon

 

2: General Motors (GM)

Percent of Warren Buffett’s Portfolio: 1.2%
Dividend Yield: 4.1%   Forward P/E Ratio: 6.1x   (as of 11/15/16)
Sector: Consumer Discretionary   Industry: Domestic Auto Manufacturers
Dividend Growth Streak: 2 years

 

General Motors is one of biggest manufacturers of cars and trucks with nearly 10 million retail vehicle sales per year. Its product mix is balanced between cars (37% of sales), trucks (38%), and crossovers (25%).

 

The company owns the iconic North American brands Buick, Cadillac, Chevrolet, and GMC. Sales in North America account for about 55% of GM’s sales.

 

Overseas, General Motors sells its vehicles under the Holden, Opel, and Vauxhall brands and conducts most of its business in Europe (19% of sales) and South America (15%). However, China is GM’s second largest market and is number one by volume.

 

Berkshire Hathaway bought its initial stake in General Motors in early 2012. Warren Buffett is very familiar with the auto industry and has stakes in a handful of auto dealerships, so his involvement with GM isn’t overly surprising.

 

Buffett likes companies that have dominant shares of their markets, and GM is no exception. General Motors has the largest market share in North America and South America and is the second largest player in the Asia, Middle East, and Africa region.

 

Buffett probably sees substantial value in many of the company’s brands as well. From cheeseburgers to Chevrolet, Warren Buffett loves American icons.

 

As a value investor, Buffett has to like General Motors’ valuation, too. The company trades at a single-digit earnings multiple and has a dividend yield near 5%.

 

The stock looks cheap because investors are worried about the auto cycle rolling over, and many still have a sour taste in their mouths from General Motors’ bankruptcy and subsequent government bailout during the financial crisis.

 

However, the “new” GM is much stronger than its predecessor and has substantially improved its earnings power and financial health – the company has roughly $25 billion in cash on the balance sheet and generated over $4 billion in free cash flow last fiscal year.

 

Buffett’s favorite holding period is “forever,” and he probably sees plenty of room for General Motors to continue growing its earnings over time as it continues cutting costs and making investments in higher-margin areas.

 

As a matter of fact, GM’s management team hopes to improve pretax profit margins from under 7% in recent years to about 10% over the next five years. Management also believes global auto sales will rise from 85 million to 130 million by 2030, which would certainly boost GM’s earnings.

 

While the auto industry is certainly cyclical, GM appears well-positioned to get through almost any environment and remain relevant for a long time to come.

 

We own shares of General Motors in our Conservative Retirees dividend portfolio, and our initial thesis on the company can be read by clicking here.

 

3: Coca-Cola (KO)

Percent of Warren Buffett’s Portfolio: 11.2%
Dividend Yield: 3.5%   Forward P/E Ratio: 21.8x   (as of 2/15/17)
Sector: Consumer Staples   Industry: Soft Drinks
Dividend Growth Streak: 54 years

 

Coca-Cola needs no introduction as the largest beverage company in the world. While investors most commonly associate the company with the Coca-Cola brand, the business actually owns more than 500 sparkling and still brands covering nearly 4,000 different beverages. Over 20 of its brands generate over $1 billion in sales each.

 

Coke is also a very global company. Only 20% of the company’s case volume was sold in North America in 2015. Latin America (29%) and Asia (22%) are major regions for Coca-Cola and are characterized by higher growth rates.

 

Coca-Cola might be Warren Buffett’s most famous stock investment. Buffett scooped up a major stake in Coca-Cola in 1988 after the 1987 stock market crash made the company’s valuation too enticing to pass up.

 

Coca-Cola’s strong brands and extensive distribution system around the world have enabled it to become the number one provider of sparkling and still beverages and increase its dividend for over 50 straight years, qualifying the company as a member of the dividend kings list.

 

Consumers have been conditioned to enjoy the company’s many brands, in part driven by Coca-Cola’s substantial marketing and advertising investments each year.

 

With strong brands that are proven to sell, Coke’s products are very difficult to replace on shelves. Competitors will have a very hard time taking share from the company.

 

Buffett loves companies with economic moats, and Coca-Cola’s moat is very strong. As per capita income grows in emerging economies, where Coke has a major presence, demand should continue rising for its products.

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4: International Business Machines Corp. (IBM)

Percent of Warren Buffett’s Portfolio: 9.1%
Dividend Yield: 3.1%   Forward P/E Ratio: 13.1x   (as of 2/15/17)
Sector: Technology   Industry: Integrated Computer Systems
Dividend Growth Streak: 21 years

 

IBM has been in business for more than 100 years and provides a wide variety of products and services, including IT infrastructure services, consulting, software, and server & storage hardware.

 

The company’s bread and butter over the years has been its mainframe computers, which are large, powerful computers that run major jobs such as managing the databases of credit card transaction of a bank.

 

Hardware only accounts for 10% of IBM’s sales, but many of IBM’s other revenue lines are supported by the installation and maintenance of mainframe computers.

 

Berkshire Hathaway began accumulating its stake in IBM during the second half of 2011, and the position has grown to be one of Buffett’s largest holdings at 8.5% of Berkshire Hathaway’s portfolio.

 

Warren Buffett has been familiar with IBM for a very long time. Buffett says he has read every annual report from IBM dating back to the early 1960s.

 

While Buffett has historically avoided technology companies due to their faster pace of change, IBM caught his eye for several reasons, beginning with the company’s strong reputation and customer relationships. Here is what Buffett had to say about his investment in IBM:

“The IT departments, you know, we’ve got dozens and dozens of IT departments at Berkshire. I don’t know how they run. I mean, but we went around and asked them and you find out that there’s – they very much get working hand in glove with suppliers. And that doesn’t mean things won’t change but it does mean that there’s a lot of continuity to it… Now, I would imagine if you’re in some country around the world and you’re developing your IT department, you’re probably going to feel more comfortable with IBM than with many companies.”

IBM’s reputation and long-standing operations have helped it amass an extremely impressive list of customers. Over 90 of the top 100 banks and all top 25 retailers in the U.S. run on IBM’s systems, and about half of all Fortune 100 companies outsource their IT operations to IBM.

 

It’s hard to imagine new entrants successfully taking away IBM’s business, especially considering the mission-critical nature of IBM’s products and services. It’s simply not worth the risk of switching to a less-proven vendor.

 

Warren Buffett was certainly aware of the changing technology landscape when he bought his initial stake in IBM, but he was likely comforted by the company’s long track record of successful evolution, steady free cash flow generation, strong brand recognition, and entrenchment with major customers.

 

Read More: 3 Reasons Buffett Blew It on IBM

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5: Phillips 66 (PSX)

Percent of Warren Buffett’s Portfolio: 4.7%
Dividend Yield: 3.2%   Forward P/E Ratio: 16.1x   (as of 2/15/17)
Sector: Energy   Industry: Oil Refining & Marketing
Dividend Growth Streak: 4 years

 

Phillips 66 was spun off from ConocoPhillips in 2012 and generates the majority of its profits from refining oil, marketing refined petroleum products such as gasoline, and selling various chemicals such as plastics that are made from oil.

 

Phillips 66 is one of Berkshire Hathaway’s larger holdings. Warren Buffett was previously invested in ConocoPhillips, which spun off Phillips 66 in 2012. He subsequently sold out of his stake in ConocoPhillips and has consistently been increasing his stake in Phillips 66.

 

Phillips 66 is benefiting from the drop in oil prices because oil is a major input cost for its refining operations. Since the price of gas hasn’t fallen as much as the price of oil, the company’s refining operations are enjoying profit increases.

 

However, Warren Buffett doesn’t buy stocks for short-term profits. When he makes an investment, he plans to hold on forever.

 

In the case of Phillips 66, Berkshire Hathaway is likely excited about the company’s plan to reshape its business and capitalize on the North American energy renaissance.

 

Management is investing in midstream and chemicals operations to drive future growth, which will make the business less dependent on refining and provide more balanced cash flows.

 

As this plays out, Phillips 66’s businesses should benefit from growing North American energy production and see their collective earnings power rise.

 

Read More: Our Analysis of Phillips 66

 

6: General Electric (GE)

Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 3.2%   Forward P/E Ratio: 18.4x   (as of 2/15/17)
Sector: Industrials   Industry: Diversified Operations
Dividend Growth Streak: 6 years

 

General Electric is an industrial conglomerate that has been around for a long time. Only 12 companies made up the original Dow Jones Industrial Average in 1896, and GE is the only one still on the list.

 

General Electric’s industrial operations are diversified across a wide range of large products such as gas turbines, oilfield equipment, aircraft engines, locomotives, and medical imaging gear. Most of its revenue is derived overseas, and the majority of GE’s industrial profits are actually from aftermarket products and services (not the original equipment sale).

 

Income investors certainly haven’t forgotten the pain GE inflicted on many portfolios during the financial crisis.

 

The company’s lending operations pushed it to the brink of bankruptcy, forcing it to cut its dividend and raise billions of dollars by issuing stock.

 

Warren Buffett swooped in during late 2008 and agreed to acquire $3 billion in preferred stock that paid a 10% dividend. Berkshire Hathaway exited his warrants five years later in a share settlement, which resulted in the firm’s current stake in GE.

 

General Electric is another American icon in Buffett’s portfolio and contains a number of strong brands and leading market share positions.

 

While the stock is a small position for Buffett, there are several reasons why Berkshire Hathaway sees some potential in GE’s long-term future.

 

Most importantly, the company is in the middle of a major transformation that will see its industrial operations shift from 57% of earnings in 2014 to over 90% by the end of 2018.

 

This transition will substantially reduce GE’s sensitivity to its capital financing operations and allow it to focus resources on its most profitable, fastest-growing markets.

 

Buffett might also be fond of GE’s industrial operations because of their mission-critical products and strong aftermarket businesses.

 

GE’s customer relationships go back decades in most of its markets. The company is entrenched with many of them because its high-value equipment requires strong knowledge of the customers’ business and meaningful aftermarket support.

 

The company’s size, economies of scale, and customer intimacy allow it to underprice smaller rivals on new equipment sales and make its money in the aftermarket business.

 

As a result, GE’s service business generates over 75% of its total industrial segment’s operating profit and makes it very difficult for competitors to gain market share.

 

Read More: GE – An Unloved Dividend Stock with Long-term Potential

 

7: United Parcel Service (UPS)

Percent of Warren Buffett’s Portfolio: 0.01%
Dividend Yield: 3.1%   Forward P/E Ratio: 18.3x   (as of 2/15/17)
Sector: Industrials   Industry: Air Freight Transport
Dividend Growth Streak: 7 years

 

United Parcel Services was founded in 1907 and has grown to become the largest package delivery company in the world. In 2015, UPS delivered 18.3 million pieces per day and generated total revenue of $58.4 billion.

 

Warren Buffett has owned United Parcel Services since 2007, although it has remained a very small part of Berkshire Hathaway’s portfolio.

 

Despite the small position size, UPS has strong competitive advantages. As a logistics company, UPS derives its economic moat from being a world-class operator with extremely efficient business processes.

 

Distributing products is largely a density game. The operator with the most routes is able to more efficiently deliver products and save customers costs.

 

With the largest integrated distribution network in its industry, UPS enjoys stronger profit margins than its peers and has proven to be an extremely resilient business – the company has paid dividends since 1969 and averaged dividend growth of 9.9% since its IPO.

 

Replicating the company’s distribution network would be extremely costly and impractical in most cases, protecting UPS’s market share.

 

Read More: Our Analysis of UPS

 

8: Procter & Gamble (PG)

Percent of Warren Buffett’s Portfolio: 0.02%
Dividend Yield: 3.0%   Forward P/E Ratio: 22.9x   (as of 2/15/17)
Sector: Consumer Staples   Industry: Soap & Cleaning Preparations
Dividend Growth Streak: 60 years

 

Procter & Gamble is one of the largest consumer packaged goods companies in the world with a large number of well-known brands across categories such as laundry detergent, health & beauty, and shaving.

 

Some of P&G’s major brands include Tide, Pampers, Charmin, Vicks, and Febreze.

 

Procter & Gamble is the definition of a blue-chip dividend stock. Warren Buffett’s position in the company resulted from his investment in Gillette back in 1989.

 

Procter & Gamble acquired Gillette in 2005, which converted Buffett’s Gillette ownership into P&G shares.

 

Buffett had gradually been reducing his stake in P&G over the last decade and announced an agreement in late 2014 to buy Duracell from P&G in exchange for his shares of P&G.

 

With the deal closing in 2016, Buffett’s P&G stake will be no more. However, Berkshire Hathaway likely wanted to own Duracell because of its strong brand recognition and market share (25%). It’s also worth noting that Duracell was part of P&G’s acquisition of Gillette, so Buffett had plenty of familiarity with the company already.

 

As technology continues to permeate every part of society, Buffett likely believes batteries will become increasingly important power sources with a long runway for demand growth.

 

9: Wal-Mart (WMT)

Percent of Warren Buffett’s Portfolio: 0.1%
Dividend Yield: 2.9%   Forward P/E Ratio: 15.7x   (as of 2/15/17)
Sector: Consumer Discretionary   Industry: Supermarkets
Dividend Growth Streak: 43 years

 

Wal-Mart is an absolutely massive company with over $480 billion in annual sales. The company’s retail stores sell a wide assortment of consumer merchandise to over 260 million customers each week.

 

Wal-Mart’s main product categories are grocery (56% of sales), health & wellness (11%), and entertainment (10%). Approximately 80% of Wal-Mart’s profits are generated in the United States.

 

Warren Buffett has owned shares of Wal-Mart for more than a decade and was likely attracted to the company’s cost advantages.

 

As the world’s largest retailer, Wal-Mart can exert massive pressure on its suppliers to keep its prices low for consumers.

 

Smaller rivals are unable to compete with Wal-Mart’s prices, which results in Wal-Mart dominating most areas it operates in.

 

Wal-Mart is currently facing its share of challenges related to rising wages and e-commerce competition, but it will remain a force in brick-and-mortar retail for many years to come.

 

It’s also hard not to like the stability of Wal-Mart’s business. Wal-Mart sells a lot of non-discretionary products, especially grocery items.

 

Consumers continue buying grocers and other household items during economic downturns, which makes Wal-Mart’s cash flows and dividend all the more reliable. As a matter of fact, Wal-Mart is a member of the dividend aristocrats list because of its consistent dividend growth.

 

Buffet likes boring businesses that generate plenty of cash, and Wal-Mart is no exception. However, Berkshire Hathaway is close to exiting its position in the company, likely driven by fears about the threat from e-commerce.

 

10: Johnson & Johnson (JNJ)

Percent of Warren Buffett’s Portfolio: 0.03%
Dividend Yield: 2.8%   Forward P/E Ratio: 16.5x   (as of 2/15/17)
Sector: Medical   Industry: Pharma
Dividend Growth Streak: 54 years

 

Johnson & Johnson is one of the biggest healthcare companies in the world with over $70 billion in sales. Most of J&J’s profits are from sales of branded pharmaceuticals, but the company also big consumer products and medical devices businesses.

 

Johnson & Johnson is a very international business with just over half of its sales coming from international markets.

 

Johnson & Johnson used to be one of Buffett’s biggest holdings 10 years ago but is one of Berkshire Hathaway’s smallest holdings today.

 

Why did Warren Buffett invest in Johnson & Johnson in the first place? For one thing, healthcare is one of the best stock sectors for dividends because of its stability.

 

People require healthcare products and services regardless of how the economy is doing, which makes Johnson & Johnson’s cash flows very reliable. The company’s sales were only down in the low-single digits during the financial crisis, and JNJ’s stock beat the S&P 500 by 29% in 2008.

 

Johnson & Johnson’s management team has also positioned the company in markets it can dominate. Roughly 70% of its sales are from number one or number two market share positions.

 

To remain competitive, the company invests over $8 billion in research and development each year. While the development of new drugs is risky, Johnson & Johnson has an excellent track record and can use the predictable cash flows from its consumer businesses to steadily fund new product research.

 

J&J has a pristine balance sheet with over $20 billion in excess cash, generates reliable free cash flow every year, earns a strong return on equity, and is well positioned to benefit from rising global spending on healthcare. These are all good things that Buffett looks for when he invests.

 

Read More: Johnson & Johnson –  A Rock Solid Dividend

 

11: Kraft Heinz (KHC)

Percent of Warren Buffett’s Portfolio: 19.2%
Dividend Yield: 2.6%   Forward P/E Ratio: 23.2x   (as of 2/15/17)
Sector: Consumer Staples   Industry: Miscellaneous Food
Dividend Growth Streak: 3 years

 

Kraft Heinz is one of the largest food and beverage companies in the world. The company sells a wide variety of condiments, sauces, cheese and dairy products, meals, meats, beverages, and other grocery products in more than 190 countries.

 

The company was formed after Heinz acquired Kraft in 2015. Both companies have operated in the food industry for over 100 years and collectively own famous brands such as Jell-O, Velveeta, Lunchables, Bagel Bites, Philadelphia, Ore Ida, Planters, Oscar Mayer, and many others.

 

Berkshire Hathaway and a private equity firm teamed up to take Heinz private in 2013 and later acquired Kraft Foods in 2015. Kraft Heinz is Warren Buffett’s second biggest holding, behind only Wells Fargo.

 

Warren Buffett’s stake in Kraft Heinz was largely a play on owning a business with extremely durable and proven brands that will continue growing over time.

 

Here is what Warren Buffett had to say about Berkshire Hathaway’s stake in Kraft Heinz:

 

“The short term doesn’t make much difference to us, because we will be in this stock forever. This is a business with us. It’s not really a stock…It’s where the new Kraft Heinz Co. is 10, 20, 50 years from now that counts to Berkshire. These are brands I liked 30-plus years ago, and I like them today. And I think I’ll like them 30 years from now.”

 

Kraft Heinz’s products are found on grocery shelves around the world and will remain entrenched for many years to come, even if their growth rates aren’t stellar. This seems like another Buffett stock that is boring, predictable, and rewarding for income investors.

 

12: Wells Fargo (WFC)

Percent of Warren Buffett’s Portfolio: 17.9%
Dividend Yield: 2.6%   Forward P/E Ratio: 13.8x   (as of 11/15/16)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 6 years

 

Wells Fargo’s roots can be traced back to the 1850s, and the company has since grown to be the nation’s third-largest bank by assets. Wells Fargo runs 90 business lines across a mix of banking, insurance, mortgage, investment, and consumer & commercial finance services.

 

Overall revenue is split almost equally between traditional loan-making operations (53% of sales) and noninterest income (47%) from brokerage advisory services, credit card fees, commissions, mortgage originations, and more.

 

Unlike most of its big bank peers, Wells Fargo has little involvement with investment banking and trading operations and instead chooses to focus on basic lending businesses that are generally thought to have less risk.

 

Wells Fargo is Warren Buffett’s biggest holding and accounts for nearly 20% of Berkshire Hathaway’s portfolio. Buffett began accumulating shares of Wells Fargo in 1989, when pessimism surrounding bank stocks was extremely high.

 

At the time, Buffett made his investment in the company because he was very impressed with its management team.

 

Banking can be a disastrous business to invest in if reckless loans are issued, so the company’s management and culture are extremely important factors. In the case of Wells Fargo, it is still thought to be the highest quality and most conservatively managed bank today.

 

Buffett also probably likes Wells Fargo for the long haul because it possesses major cost advantages over its smaller peers. The bank has more retail deposits than any other bank in America and has seen its total deposits grow from $3.7 billion in 1966 to $1.2 trillion in 2015.

 

Wells Fargo only pays 8 basis points on its deposits, which allows its lending operations to make money in virtually any interest rate environment.

 

As the U.S. economy continues expanding, Wells Fargo should be able to mint money with its loan book and continue earnings superior returns on equity relative to its peers.

 

Buffett has not made any trades in Wells Fargo since the scandal that emerged in 2016. He would also face a steep tax bill if he sold his shares, which have a very low cost basis.

 

Read More: Our Analysis of Wells Fargo

 

13: Sanofi (SNY)

Percent of Warren Buffett’s Portfolio: 0.1%
Dividend Yield: 2.6%   Forward P/E Ratio: 13.9x   (as of 2/15/17)
Sector: Medical   Industry: Pharma
Dividend Growth Streak: 22 years

 

Sanofi is one of the biggest pharma companies in the world and focuses on therapeutic areas such as cardiovascular disease, thrombosis, oncology, metabolic diseases, central nervous system, internal medicine, and vaccines.

 

Some of the company well-known drugs are Ambien (sleep aid) and Plavix (combats cardiac plaque). The business is also very international with sales in emerging markets representing over 30% of total revenue.

 

Warren Buffett has owned shares of Sanofi since 2006 and is optimistic about the company’s franchise value and opportunities for long-term growth.

 

Drug pipelines are notoriously hard to predict, and Sanofi spends 14% of its revenue on research and development each year. Few companies can match the magnitude and pace of Sanofi’s spending on innovation and the intellectual property accumulated by the business.

 

The company’s investments have helped it launch more products over shorter periods of time to drive growth. From 2008-2012, Sanofi launched three new products. From 2012-2014, the company launched 10 new products.

 

As R&D spending rises through 2020, Sanofi’s growth potential should increase as well. Investors should note that Sanofi’s dividend is subject to withholding tax (the dividend yield above is post-withholding taxes).

 

Income investors should note that Sanofi’s dividend is subject to a steep withholding tax for U.S. investors. The dividend yield reported above is net of withholding taxes, reflecting the actual cash an investor would receive. This is why our yield for the company is lower than Sanofi’s yield listed on other sites (e.g. Google Finance).

 

14: Seritage Growth Properties (SRG)

Percent of Warren Buffett’s Portfolio: N/A (Buffett bought SRG personally)
Dividend Yield: 2.3%   Forward P/E Ratio: 21.2x   (as of 2/15/17)
Sector: Financials   Industry: Commercial REIT
Dividend Growth Streak: 0 years

 

Seritage was spun off from Sears Holdings in July 2015 and purchased over 260 Sears and Kmart stores from the retailer for just under $3 billion. This deal was done to help Sears improve its cash position and reduce costs.

 

Seritage leased back all but 11 of its properties to Sears. As a REIT, Seritage makes money by collecting rent checks each month from its tenants. Today, Sears and Kmart stores account for almost 80% of Seritage’s rent revenue.

 

Unlike the other stocks on this list which are owned by Berkshire Hathaway, Warren Buffett personally purchased his 8% stake in Seritage Growth Properties in December 2015.

 

As most investors are aware, Sears is quickly fading into the horizon. Buying shares in a REIT that relies heavily on Sears today is indeed a curious move by Warren Buffett. He must see something else.

 

Most likely, Warren Buffett likes Seritage’s valuation because the REIT is gradually re-leasing space from Sears to third-party retailers for much higher rent rates than what the company is currently receiving from Sears for its properties.

 

In other words, the company’s current earnings are being significantly held back by its leases with Sears. As its mix of tenants improves to include more third-party retailers such as Nordstrom and Dick’s Sporting Goods, Seritage’s earnings power should meaningfully improve. Buffett probably sees high value in the prime retail locations owned by Seritage and believes the company is under-earning.

 

Buffett also likes boring, predictable businesses, and many commercial REITs fit the bill. Cashing rent checks each month is not a bad business by any means, and prime retail locations should presumably rise in value over time to further enhance Seritage’s worth.

 

As the company begins to unlock the value of its real estate, the stock could do well and provide strong dividend growth for many years to come.

 

15: U.S. Bancorp (USB)

Percent of Warren Buffett’s Portfolio: 3.0%
Dividend Yield: 2.0%   Forward P/E Ratio: 15.7x   (as of 2/15/17)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 6 years

 

U.S. Bancorp was founded in 1863 and is the fifth biggest bank in the country as measured by assets. The company provides a full range of financial services, including lending, cash management, capital markets, and investment management services.

 

By business line, U.S. Bancorp generates 41% of its revenue from consumer and small business banking, 31% from payment services, 17% from whole banking and commercial real estate, and 11% from wealth management and securities services.

 

Overall, fee income accounted for 45% of total revenue in 2015. The company’s diversification makes it a more consistent and predictable business.

 

U.S. Bancorp has been one of Warren Buffett’s stock picks since before the financial crisis when he initiated a position in early 2007.

 

The company has a strong history of making high quality loans and remaining well capitalized relative to peers. As a matter of fact, U.S. Bancorp is the highest rated peer bank across all rating agencies when it comes to debt, providing it with funding and competitive advantages.

 

If Buffett owns the stock, it is safe to assume that USB’s culture is a conservative one that manages risk very carefully. This discipline shows up in USB’s profitability and efficiency metrics, which rank better than its peers.

 

Bank stocks look relatively cheap today because interest rates are expected to remain lower for longer. When rates are low, banks make less money on their lending operations.

 

Despite the tough environment for banks, USB’s loan portfolio has been growing at an annualized rate near 7% over the last decade.

 

The company’s loan book is also well-diversified and maintains little exposure to energy markets (1.2% of total exposure). Commercial loans are the company’s biggest lending category at 34% of average loans in 2015, followed by residential mortgages (27%) and commercial real estate (17%).

 

Warren Buffett owns U.S. Bancorp because it is a high quality, conservatively managed business that has demonstrated an ability to achieve consistent growth. Over time, these types of companies should compound shareholders’ capital nicely.

 

16: Monsanto (MON)

Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 2.0%   Forward P/E Ratio: 22.3x   (as of 2/15/17)
Sector: Basic Materials   Industry: Agriculture
Dividend Growth Streak: 16 years

 

Monsanto is one of Berkshire Hathaway’s three new positions initiated during the fourth quarter of 2016. Monsanto is a global provider of seeds, herbicides, biotechnology traits, and other agricultural products for farmers.

 

Before you get excited about the company’s impressive dividend growth track record, Bayer AG announced plans to acquire Monsanto for $128 per share in September 2016. Monsanto currently trades for $109, so Buffett is essentially betting that the acquisition will successfully close.

 

Buffett is very familiar with the agricultural industry (he sold his investment in Deere last quarter) and clearly feels confident in the likelihood of these two companies combining.

 

17: M&T Bank Corp. (MTB)

Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 1.7%   Forward P/E Ratio: 19.3x   (as of 2/15/17)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 0 years

 

M&T Bank was established in 1856 and is one of America’s largest 20 commercial banks. Its 800+ domestic branches span across eight states mostly located in the eastern half of the U.S.

 

The company acquired Hudson City Bancorp in late 2015 for $5.2 billion, increasing its loan portfolio by nearly 30% while providing meaningful opportunities for cost savings and growth in adjacent markets.

 

The deal further improves M&T regulatory capital ratios, was immediately accretive to book value per share, and offers an attractive internal rate of return of about 18%.

 

M&T has been one of Berkshire Hathaway’s stock picks since Buffett bought preferred stock in the company back in 1991. His shares later converted into common stock about five years later.

 

M&T has a long history of conservative risk management practices. The company has enjoyed relatively low earnings volatility due to its careful credit underwriting and also benefits from the diversity of its operations, which include wealth and fiduciary units.

 

As a result, M&T has consistently outperformed its peers as measured by profitability, efficiency, and net charge-off ratios. The company has also grown its net operating earnings per share by 15% per year since 1983, steadily compounding its value.

 

Shareholders have also been rewarded over this time period, enjoying 13% annualized dividend growth since 1983 and an annual total return of 18.9% since 1980 – that’s the 24th best return of all U.S.-based stocks that traded publicly since 1980.

 

Warren Buffett likes to own the best companies in a particular industry, and M&T sure makes a strong case. The business is one of the safest banks that money can buy and has demonstrated an excellent ability to consistently grow earnings over time.

 

18: Apple (AAPL)

Percent of Warren Buffett’s Portfolio: 4.5%
Dividend Yield: 1.7%   Forward P/E Ratio: 14.9x   (as of 2/15/17)
Sector: Technology   Industry: Mini Computers
Dividend Growth Streak: 4 years

 

Apple sells smartphones, tablets, computers, and an assortment of software, services, and accessories. iPhones have been the biggest driver of Apple’s growth and accounted for approximately 66% of the company’s total revenue last fiscal year. Apple computers (Macs) accounted for 11% of sales, and iPads made up another 10%. Software, services, and sales of other hardware such as iPods accounted for the remaining 13% of Apple’s revenue.

 

Warren Buffett acquired a $1 billion stake in Apple during the first quarter of 2016. Apple possesses several characteristics that Warren Buffett covets.

 

Most importantly, Apple owns the world’s most valuable brand. Billions of consumers and businesses alike are familiar with the Apple brand and know that it stands for quality. While consumer technologies and preferences are constantly evolving, Apple’s reputation is stellar and makes it easier for the company to enter new markets and sell to a large group of loyal followers.

 

Apple is also a free cash flow machine. Over the last decade, Apple’s free cash flow per share grew from 38 cents in fiscal year 2005 to $12.09 in fiscal year 2015. Throughout that period, Apple’s annual return on equity averaged an outstanding 30%.

 

Of course, history doesn’t repeat itself – especially in the tech sector. Much of Apple’s success was fueled by the mass adoption of smartphones. That market is now saturated, which has caused Apple’s growth to cool off and sent its stock down nearly 30% over the last year.

 

As a result, Buffett was able to buy in to the world’s most valuable brand for less than 11 times earnings. Buffett likely didn’t buy Apple for its smartphone franchise but rather for its future growth opportunities. As usual, he is looking out a number of years while the market is focusing on Apple’s next few quarters, which will likely remain challenged due to smartphone saturation.

 

From self-driving cars to virtual reality and a slew of other smart devices and software services yet to be invented, there are numerous paths Apple can pursue for growth.

 

Buffett generally prefers to invest in more predictable businesses that don’t have to reinvent themselves, which makes his bet on Apple a bit surprising.

 

However, after tripling Berkshire’s position in the company last quarter, he apparently believes that an iconic brand, a $60 billion pile of cash on the balance sheet, and a relatively cheap valuation provide enough margin of safety to make Apple a safe bet over the next decade.

 

Read More: Our Analysis of Apple

 

19: Mondelez International (MDLZ)

Percent of Warren Buffett’s Portfolio: 0.02%
Dividend Yield: 1.7%   Forward P/E Ratio: 21.2x   (as of 2/15/17)
Sector: Consumer Staples   Industry: Miscellaneous Food
Dividend Growth Streak: 3 years

 

Kraft Foods spun off Mondelez in October 2012. Mondelez is a giant food company focused primarily on snack products (85% of sales). The company owns iconic brands such as Oreos, Ritz, Chips Ahoy, Cadbury, and Trident.

 

By geography, Mondelez generates 63% of its revenue in developed markets and 37% in emerging markets.

 

Berkshire Hathaway’s small position in Mondelez dates back to late 2012 when Kraft Foods completed its spin-off of the company through a stock distribution.

 

Warren Buffett was an existing Kraft Foods shareholder and therefore received shares of Mondelez.

 

Given Berkshire Hathaway’s stake in Kraft Heinz, we know that Buffett likes this type of business. It’s simple to understand, sells essential products, owns a portfolio of strong brands, and generates highly predictable cash flows.

 

The global snacking market also offers plenty of room for growth. The company estimates its size at $1.2 trillion and expects growth to be driven by rising consumption in emerging markets.

 

With number one global market share positions in biscuits, candy, and chocolate, Mondelez should benefit over time as consumption grows.

 

While Mondelez is far from an exciting business, Warren Buffett’s “slow and steady” investment strategy has been a good one.

 

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20: American Express (AXP)

Percent of Warren Buffett’s Portfolio: 7.6%
Dividend Yield: 1.6%   Forward P/E Ratio: 14.1x   (as of 2/15/17)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 5 years

 

American Express was founded in 1850 and is a financial services company best known for its credit card and travel-related services used by consumers and businesses. In 2015, over $1 trillion was billed on American Express cards.

 

American Express is one of Warren Buffett’s oldest and most successful stock picks. Buffett first invested in American Express in the mid-1960s, and the company remains one of his largest positions today.

 

True to his value investor roots, Buffett first purchased shares of American Express in the wake of the infamous salad oil scandal, which caused the company to incur major liabilities.

 

Fortunately for Buffett, he realized that the event did not impact American Express’ long-term earnings power or franchise value and snapped up 5% of the company’s shares at a bargain price.

 

Buffett’s fascination with the business likely starts with its powerful brand and status symbol. American Express is consistently rated as one of the most valuable brands in the world, and its cards are used in over 180 countries.

 

The typical American Express cardholder spends significantly more than cardholders of the company’s competitors. As a result, American Express has been able to command superior discount rates with merchants (merchants benefit from higher sales and more loyal customers when they work with AXP) and offer more attractive rewards to its cardholders (AXP reinvests its higher discount revenue from merchants).

 

This creates a bit of a network effect and helps American Express continue acquiring new cardholders characterized by high creditworthiness and above-average spending.

 

While the competitive environment has intensified and new cardholder growth has become more challenging to come by, Warren Buffett’s massive unrealized gains on his shares of American Express will likely keep him in the stock for a long time to come (his tax bill will be enormous once he sells).

 

21: Delta Air Lines (DAL)

Percent of Warren Buffett’s Portfolio: 2.0%
Dividend Yield: 1.6%   Forward P/E Ratio: 9.8x   (as of 2/15/17)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 3 years

 

Delta Air Lines is one of the biggest passenger airlines in the world. The company has routes servicing over 340 destinations located across more than 60 countries. Delta Air merged with Northwest Airlines in 2008 to create the largest airline in the world.

 

Operating airlines is a tough business. In fact, Delta declared bankruptcy in 2005, when it was the third largest airline company. Southwest (LUV) and JetBlue (JBLU) are the only two major airlines that have not filed for bankruptcy.

 

Volatile fuel prices, costly union labor forces, steep price competition, and capital intensive operations are just some of the major challenges faced by airlines. There are some positives, however.

 

The high costs required to operate an airline create barriers to entry. A large operator such as Delta can spread its fixed costs across all of its routes, allowing it to deliver it services more efficiently than smaller rivals or new entrants. Only so many routes between two destinations are needed as well, making it all the more difficult for a new player to gain share.

 

The big operators have consolidated in recent years, too. Delta Air and Northwest Airlines merged in 2008, United and Continental combined forces in 2010, and American Airlines and US Airways Group merged in 2013.

 

According to the Wall Street Journal, American, United Continental, Delta Air Lines, and Southwest now control more than 80% of U.S. domestic capacity, up significantly from five years ago prior to the merger consolidation activity.

 

It remains to be seen if this consolidation can result in a more rational competitive environment, marked by higher ticket prices and improved profitability from economies of scale and restructuring initiatives.

 

Berkshire Hathaway began purchasing shares of Delta in the third quarter of 2016. Delta is arguably one of the highest quality airlines. From leading operational metrics to fuel costs, the company is clearly ahead of the industry’s average marks.

 

Berkshire was likely attracted to Delta’s competitive advantages, which are nicely outlined here. Delta’s union labor force is much smaller than its rivals, the company is the largest airline by passenger volume (helps airplane utilization and leverages fixed costs), Delta buys cheaper used aircraft, and it even owns its own fuel refinery to save on costs (Buffett is very familiar with the refinery business).

 

These qualities help Delta generate great free cash flow and earn a higher return on capital, which creates potential for faster earnings growth. Given the size of Warren Buffett’s portfolio, the firm needs to invest in rather capital intensive businesses that are big enough investment targets. Airlines apparently fit the bill, but they remain in the “too hard” bucket for me.

 

22: Bank of New York Mellon (BK)

Percent of Warren Buffett’s Portfolio: 0.7%
Dividend Yield: 1.6%   Forward P/E Ratio: 13.5x   (as of 2/15/17)
Sector: Financials   Industry: Major Regional Banks
Dividend Growth Streak: 6 years

 

Bank of New York Mellon was established in 1784 and provides investment management, investment services, and wealth management that help institutions and individuals manage their financial assets. BNY Mellon has over $28 trillion assets under custody and/or administration and operates in more than 100 markets.

 

The company’s investment management business offers a range of investment strategies (e.g. equities, fixed income, alternatives), investment vehicles (e.g. mutual funds, separate accounts), and wealth management services (e.g. estate planning, private banking).

 

BNY Mellon’s investment services include execution and processing of trades, servicing investments (e.g. outsource middle office functions, safekeep assets), and capital and liquidity services (e.g. optimize funding and operating capital, access global markets).

 

Warren Buffett’s Berkshire Hathaway bought its first shares of Bank of New York Mellon during the third quarter of 2010.

 

One of the reasons why Warren Buffett might have been attracted to BNY Mellon is because the company is solely focused on the investment process and the investment life cycle. As a result, the firm has amassed strong market share positions across most of its businesses.

 

Rivals simply have a hard time competing with BNY Mellon’s expertise surrounding complex areas such as the clearing and settlement processes for trades and general market infrastructure.

 

This has helped BNY Mellon build up sizable scale in its markets, enabling it to provide the most cost-effective and comprehensive services to its clients.

 

BNY Mellon is also conservatively managed and has consistently earned excellent ratings from all four major credit rating agencies.

 

The company seems very likely to remain a pillar of the world’s investment infrastructure and will continue being relevant and highly profitable for many years to come.

 

23: Moody’s (MCO)

Percent of Warren Buffett’s Portfolio: 1.6%
Dividend Yield: 1.4%   Forward P/E Ratio: 21.6x   (as of 2/15/17)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 8 years

 

Moody’s is a leading provider of credit ratings, research, and risk analysis services. The company’s ratings and analysis track debt that covers over 11,000 corporate issuers, 21,000 public finance issuers, and more than 76,000 structured finance obligations.

 

The company’s ratings and research help investors better understand the risk behind fixed-income securities they are considering buying to help markets operate more efficiently.

 

Warren Buffett bought his first shares of Moody’s back in 2000 around the time that the company went public.

 

Warren Buffett probably liked Moody’s because of its duopoly position with Standard & Poor’s (regulations have limited the number of ratings agencies), strong pricing power, well-known brand, and essential services (e.g. a company can’t issue a bond without a ratings agency).

 

These factors enabled Moody’s to earn extraordinary returns on capital and develop a high level of trust with clients. Barriers to entry are very high.

 

Following the financial crisis, there was plenty of controversy surrounding rating agencies, which placed strong ratings on bonds backed by subprime mortgages that led to the housing crisis.

 

As a result, substantial damage was done to their brands and they came under increased government scrutiny.

 

However, ratings agencies have fared much better following the financial crisis than many investors expected.

 

Today’s low interest rate environment has led to significant bond issuances around the world, which has helped lift their businesses.

 

Moody’s continues to be a free cash flow machine and looks to remain a force in the global financial markets for a long time to come.

 

Read More: Analysis of S&P’s Parent Company

 

24: Restaurant Brands (QSR)

Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 1.3%   Forward P/E Ratio: 31.2x   (as of 2/15/17)
Sector: Consumer Discretionary   Industry: Food & Restaurants
Dividend Growth Streak: 1 year

 

Restaurant Brands International is the parent company of Burger King and Tim Hortons, which combined in 2014 to claim the title of the world’s third-largest fast food business with over 19,000 restaurants.

 

Burger King is the second-largest fast foot hamburger chain in the world and serves more than 11 million customers every day.

 

Tim Hortons was founded in 1964 and is the largest quick service restaurant chain in Canada. The restaurant specializes in coffee, baked goods (e.g. doughnuts), and home-style lunches.

 

Berkshire Hathaway’s stake in Restaurant Brands arose from Warren Buffett’s involvement with the merger between Burger King and Tim Hortons, which granted him warrants to buy stock in the combined business.

 

Berkshire Hathaway also owns $3 billion of preferred shares in the company, which pay him a high-yield dividend of 9% each year.

 

The consumer sector is home to many famous brands and has historically been one of Warren Buffett’s favorite places to pick stocks.

 

Burger King and Tim Hortons are two of the most well-known restaurant brands in the United States and Canada.

 

Importantly, both businesses seem to have plenty of potential for international growth. Burger King is already in more than 100 different countries, and Tim Hortons has little presence outside of Canada.

 

The company’s global scale, brand recognition, and prominent locations make it a free cash flow machine that should enjoy steady growth over the long term.

 

25: Twenty-First Century Fox (FOXA)

Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 1.2%   Forward P/E Ratio: 15.9x   (as of 2/15/17)
Sector: Consumer Discretionary   Industry: Movie & TV Production & Distribution
Dividend Growth Streak: 3 years

 

Twenty-First Century Fox is a media conglomerate that owns all of the Fox-branded TV shows such as Fox Sports, Fox Business, and Fox News. The business also owns the 20th Century Fox studio and a number of other TV stations and regional networks across the world.

 

Cable Networks Programming accounts for the bulk of Fox’s profits, generating 69% of company-wide EBITDA in fiscal year 2015. Filmed Entertainment was its next biggest contributor at 21% of EBITDA.

 

Fox was spun off from Rupert Murdoch’s News Corp publishing businesses in 2013. Its crown jewel was The Wall Street Journal.

 

Warren Buffett’s Berkshire Hathaway began accumulating shares of Twenty-First Century Fox at the end of 2014.

 

At the time of Buffett’s purchase, Fox was suffering from some poor ratings and offered Berkshire a reasonable valuation to get in at.

 

As a long-term investor, Warren Buffett doesn’t concern himself much with near-term events.

 

Instead, he likely viewed Fox as a company with strong brands and cable networks that could be enhanced, improving the company’s earnings power.

 

Additionally, a lot of Fox’s content is in valuable categories such as sports. Demand for premium content is rising as more distribution platforms such as Netflix become available around the world.

 

As this plays out, it seems likely that Fox could enjoy new ways to further monetize its content across the globe. In the meantime, Fox should continue generating predictable cash flows thanks to its diversified revenue mix and healthy retransmission fees.

 

Overall, Buffett seems to have been attracted to Fox because of its reasonable valuation, high-potential portfolio of content, and long-term opportunities to monetize its content domestically and internationally as distribution platforms continue growing.

 

26: Goldman Sachs (GS)

Percent of Warren Buffett’s Portfolio: 1.8%
Dividend Yield: 1.0%   Forward P/E Ratio: 12.7x   (as of 2/15/17)
Sector: Financials   Industry: Investment Brokers
Dividend Growth Streak: 6 years

 

Goldman Sachs is arguably the most iconic bank on Wall Street. The company’s revenue mix is spread across equities (23%), fixed income / currencies / commodities (FICC – 22%), investment banking (21%), investment management (18%), and investing & lending (16%).

 

The company’s mix has gradually shifted away from FICC, which has come under regulatory pressure targeting opaque derivatives, in favor of relatively more stable businesses such as investment management and banking.

 

Warren Buffett’s history with Goldman Sachs dates back to the financial crisis. Berkshire Hathaway purchased $5 billion shares of preferred stock that paid a high-yield dividend of 10%.

 

Buffett was able to make this opportunistic deal because credit markets were freezing up, banks needed more capital, and fear was running high – especially surrounding Wall Street Banks.

 

Warren Buffett also received warrants that were later converted into roughly $2 billion of Goldman Sachs’ shares.

 

Buffett likely believed that Goldman Sachs would retain most of its franchise value after the financial crisis and felt confident that the government’s bailout of banks would keep his investment safe.

 

Goldman had long been known as the premier Wall Street destination, attracting the “best of the best” talent.

 

The company remains the number one ranked merger advisor and equity underwriting franchise and does investing banking business with over 8,000 clients across 100 countries. The firm clearly dominates the M&A market.

 

While banks are still contending with a challenging regulatory and macro environment today, Goldman will remain a key player in finance for decades to come.

 

Read More: Our Analysis of Goldman Sachs

 

27: Costco (COST)

Percent of Warren Buffett’s Portfolio: 0.5%
Dividend Yield: 1.0%   Forward P/E Ratio: 29.5x   (as of 2/15/17)
Sector: Consumer Discretionary   Industry: Discount Retail
Dividend Growth Streak: 13 years

 

Costco started in 1983 and is the largest wholesale-club retailer in the country. The company operates large membership warehouses that offer members reasonably low prices on an assortment of products covering categories such as groceries, electronics, apparel, and more.

 

Costco has been one of Warren Buffett’s stock picks since 2000. Berkshire Hathaway scooped up shares after the stock plunged by nearly 40% during the year.

 

Buffett was very familiar with the company as Berkshire’s vice chairman, Charlie Munger, served on Costco’s board in the late 1990s.

 

Warren Buffett was likely attracted to Costco because of its low-cost producer status, reputation for quality, and loyal customer base.

 

Costco’s advantages begin with its 80 million cardholders (a membership card is required to shop at Costco). The company’s large group of customers provides Costco with excellent purchasing power over its suppliers, helping keep prices below traditional wholesale or retail outlets.

 

Management also keeps the company focused on providing excellent value by eliminating as many frills and costs as possible. Costco stores are far from extravagant on the inside and even eliminate the use of bags at checkout to save money and price their products lower.

 

The assortment of products at Costco is also unique. Many of its products are exclusive, and customers really can’t find the same mix of quantity, quality, and value anywhere else. This has helped Costco continue its strong growth despite increased competition from e-commerce players such as Amazon.

 

As a result of its low prices, quality merchandise, and simple shopping experience, Costco’s membership renewal rate has been excellent at around 90%.

 

What’s held Buffett back from buying more of this wonderful business? Unlike its products, the stock rarely looks like a bargain.

 

In hindsight, Berkshire surely wishes it had loaded up on more shares of Costco back in 2000.

 

Read More: Our Analysis of Costco

 

28: Graham Holdings (GHC)

Percent of Warren Buffett’s Portfolio: 0.04%
Dividend Yield: 1.0%   Forward P/E Ratio: 16.4x   (as of 2/15/17)
Sector: Consumer Discretionary   Industry: Schools
Dividend Growth Streak: 1 year

 

Graham Holdings was formerly known as The Washington Post up until 2013 when the company’s flagship newspaper was sold to Amazon.

 

After the sale, Graham Holdings was left as a diversified education and media company. It’s perhaps best known for its Kaplan subsidiary, which provides an array of educational services such as certificate degrees and test preparation materials.

 

Warren Buffett purchased a stake in The Post back in 1973. At the time, he was attracted to the company’s newspaper businesses due to their strong brands and focus on in-demand content that was difficult to obtain elsewhere.

 

As we all know, the media landscape has completed changed since the 1970s. Content is now readily available, and national newspapers have struggled to monetize their articles as effectively as they once did.

 

In 2014, after the company’s sale of The Washing Post newspaper, Berkshire decided to exchange most of its shares in Graham Holdings for a subsidiary TV station owned by the company and some cash.

 

It seems safe to say that Warren Buffett is not interested in continuing to own Graham Holdings since the underlying business has changed so much.

 

29: American Airlines (AAL)

Percent of Warren Buffett’s Portfolio: 1.4%
Dividend Yield: 0.8%   Forward P/E Ratio: 10.4x   (as of 2/15/17)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 0 years

 

American Airlines was formed in December 2013 as a result of the merger between American Airlines and US Airways Group. The company operates an average of 6,700 flights per day to 339 destinations in 54 countries. With over $40 billion in revenue in 2015, American Airlines is one of the largest airlines in the world. The company’s roots can be traced back to the 1930s.

 

Operating airlines is a tough business. In fact, American Airlines declared bankruptcy not too long ago in 2011. Southwest (LUV) and JetBlue (JBLU) are the only two major airlines that have not filed for bankruptcy.

 

Volatile fuel prices, costly union labor forces, steep price competition, and capital intensive operations are just some of the major challenges faced by airlines. There is a small silver lining, however.

 

The high costs required to operate an airline create barriers to entry. A large operator such as American Airlines can spread its fixed costs across all of its routes, allowing it to deliver it services more efficiently than smaller rivals or new entrants. Only so many routes between two destinations are needed, too, making it all the more difficult for a new player to gain share.

 

The big operators have consolidated in recent years as well. Delta Air and Northwest Airlines merged in 2008, United and Continental combined forces in 2010, and of course American Airlines and US Airways Group merged in 2013.

 

According to the Wall Street Journal, American, United Continental, Delta Air Lines, and Southwest now control more than 80% of U.S. domestic capacity, up significantly from five years ago prior to the merger consolidation activity.

 

It remains to be seen if this consolidation can result in a more rational competitive environment, marked by higher ticket prices and improved profitability from economies of scale and restructuring initiatives.

 

Berkshire Hathaway began buying shares of American Airlines in the third quarter of 2016. The firm was likely attracted to American’s strong domestic and international hub structure. Since American’s routes are generally longer, they can charge more per mile and keep their planes better utilized.

 

Economies of scale, coupled with American’s strong international presence and the industry’s consolidation, are possible reasons for Berkshire’s interest. Airlines still fall in the “too hard” bucket for me.

 

30: Visa (V)

Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 0.8%   Forward P/E Ratio: 26.1x   (as of 2/15/17)
Sector: Business Services   Industry: Financial Transaction Services
Dividend Growth Streak: 9 years

 

Visa is a global payments technology business that enables consumers and businesses to make electronic payments. The company’s processing network handles the authorization, clearing, and settlement of payment transactions around the globe.

 

Visa has over 300 million cards in circulation and is number one in credit card and debit card networks based on purchase volumes.

 

Visa makes money by collecting a fee every time one of its cards is used to complete a transaction. Unlike banks, Visa doesn’t issue cards or take on any credit risk. It just collects fees not unlike a toll taker.

 

Warren Buffett first bought Visa shares in late 2011. As a long-term investor, Warren Buffett and his team are thinking about what Visa looks like at least 10 years from now.

 

They are most likely encouraged by the fact that cash transactions still account for the far majority of total transactions around the world.

 

Just like MasterCard, the number of Visa credit and debit cards in circulation should rise over time as payments are increasingly made electronically.

 

More cards in circulation mean more transactions, driving earnings higher for Visa. So long as Visa’s processing network remains dominant, the company’s future looks bright.

 

31: MasterCard (MA)

Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 0.8%   Forward P/E Ratio: 25.6x   (as of 2/15/17)
Sector: Business Services   Industry: Financial Transaction Services
Dividend Growth Streak: 5 years

 

MasterCard operates the second biggest payments network after Visa and enables business and consumers to use electronic payments instead of cash and checks.

 

The company makes money by charging fees to card issuers and acquirers for using its transaction processing services. MasterCard collects a fee based on the number and value of transactions completed using its branded cards.

 

Warren Buffett initiated his stake in MasterCard in early 2011 and was likely attracted to the company for several reasons, including its dominant market position.

 

First, MasterCard generates outstanding returns on invested capital, which is usually a sign of a strong economic moat. The business has earned at least a 40% return on invested capital in each of the last four years and maintains an operating margin in excess of 50%. Not surprisingly, MasterCard is an excellent free cash flow generator.

 

The company’s business model is appealing because the company essentially operates as a toll taker, collecting a fee every time a transaction is completed using one of its cards. Importantly, MasterCard does not have to worry about credit risk, which is taken on by the banks backing the credit card.

 

With over 80% of the world’s transactions still conducted using cash, there is presumably an extremely long runway for MasterCard’s credit cards to continue growing in use. As more transactions take place using its cards, the company’s profits will rise.

 

32: Sirius XM Holdings (SIRI)

Percent of Warren Buffett’s Portfolio: 0.5%
Dividend Yield: 0.8%   Forward P/E Ratio: 26.3x   (as of 2/15/17)
Sector: Consumer Discretionary   Industry: Radio & TV Broadcasting
Dividend Growth Streak: 0 years

 

Sirius is a satellite radio company and was founded in 1990. The company makes money by transmitting a number of premium satellite radio channels on a subscription fee basis to its 31.3 million subscribers. Its content covers everything from sports, music, and entertainment to weather, news, comedy, and traffic.

 

Berkshire Hathaway initiated a position in Sirius during the fourth quarter of 2016, but his familiarity with the company dates back much further. Sirius is controlled by Liberty Media Corporation, a company Buffett is also invested in.

 

Sirius is a remarkably profitable and stable business that throws off gobs of free cash flow. The company earned an operating margin near 30% last year and grew free cash flow per share by 50%. Sales have compounded by 10.7% annually over the last five years as well.

 

What is the key to Sirius’s successful business model? A base of more than 30 million paying subscribers generates healthy recurring revenue, and every incremental subscriber has a high incremental margin. In other words, it doesn’t cost Sirius much to add a new customer, dropping much of the new revenue straight to the company’s bottom line and increasing margins over time.

 

Sirius has long-term distribution relationships with every major automaker, including General Motors (another Buffett stock). In fact, the company’s satellite radios are available in more than 75% of new cars, and most automakers include a subscription to Sirius’s radio service in the sale of lease of their new vehicles.

 

As penetration rates continue creeping higher and auto sales grow, Sirius’s business will continue expanding. Breaking into Sirius’s relationships with automakers would be extremely difficult, protecting the company. While the rise of digital music services such as Pandora could pose a threat to satellite radio as cars become more connected, Sirius also has its own internet radio service to help it remain relevant.

 

Warren Buffett loves investing in companies that dominate their markets, generate predictable free cash flow, and have numerous opportunities for long-term earnings growth. Sirius certainly seems to fit this profile.

 

Investors should note that Sirius only began paying quarterly dividends in November 2016.

 

33: Torchmark Corporation (TMK)

Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 0.7%   Forward P/E Ratio: 16.3x   (as of 2/15/17)
Sector: Financials   Industry: Life Insurance
Dividend Growth Streak: 11 years

 

Torchmark is a major provider of life and health insurance products. The company primarily distributes its insurance products through exclusive agency and direct response marketing channels and targets the middle-income market.

 

Like many other Berkshire Hathaway holdings, Torchmark is a low-cost operator in its market and earns very high underwriting margins in the industry. The business runs very lean and is able to spread its costs and risks over its base of more than $3 billion of annualized life and health premiums in force.

 

Warren Buffett’s stake in Torchmark dates back more than 15 years, and Buffett is no stranger to insurers. After all, one of his most legendary investments ever was Geico.

 

The insurance business model is an enticing one because insurers receive money upfront when they write new policies, but they don’t have to pay the money back until claims are made.

 

In the meantime, they can invest policy premiums in bonds and stocks to earn a return. As long as the insurance company is savvy and conservative when it comes to risk management, they can mint money.

 

Torchmark is indeed conservative and invests primarily in investment grade fixed-maturity assets. Since the company’s insurance underwriting margins are so strong, the company does not need to pursue an aggressive investment strategy.

 

The company’s free cash flows are also remarkably resilient. About 90% of Torchmark’s revenue each year is generated by policies that were sold in prior years, helping it generate cash in virtually any environment.

 

As a testament to its sturdiness, Torchmark generated a double-digit return on equity throughout the financial crisis.

 

Torchmark seems likely to remain in Berkshire Hathaway’s portfolio for a long time to come as it continues compounding its earnings.

 

Read More: Analyzing Insurance Provider Aflac

 

34: Southwest Airlines (LUV)

Percent of Warren Buffett’s Portfolio: 1.5%
Dividend Yield: 0.7%   Forward P/E Ratio: 14.3x   (as of 2/15/17)
Sector: Transportation   Industry: Airlines
Dividend Growth Streak: 5 years

 

Southwest Airlines has been in business for more than 45 years and operates a network of 101 destinations in the U.S. and eight other countries. The company has long differentiated itself by providing excellent customer service, treating its employees well, and offering low-cost fares, made possible by fast, no-frills service (e.g. no seat reservations, no meals, and exclusively flies one type of aircraft from Boeing). As a result, full-service airlines can never compete with Southwest on cost, and the airline has been better able to survive the industry’s unpredictable ups and downs compared to its rivals.

 

Berkshire Hathaway began buying shares of Southwest during the fourth quarter of 2016, adding the fourth airline holding to its portfolio.

 

As we discussed above, airlines have historically been terrible investments and incredibly challenging businesses to run. From 1977 through 2009, airlines collectively lost $52 billion!

 

However, the times could be changing. Airlines generated $45 billion in profits from 2010 through 2015, certainly helped by the plunge in fuel prices. But we know that Buffett doesn’t make bets on short-term trends.

 

Given the amount of consolidation that has taken place in the airline industry over the last decade (the four largest carriers control over 80% of U.S. domestic capacity), Buffett likely believes “this time is different.”

 

With more power resting in fewer hands, the airline industry could finally become a more rational and profitable market for the long term. Many investors are biased against the industry given its checkered history, potentially setting up a great investment opportunity. Buffett’s smattering of bets on four different airlines seems to indicate he is bullish on the entire space rather than a single operator.

 

Remember the last part of Warren Buffett’s quote that we reference above: “If [the airline industry] ever gets down to one airline it will be a wonderful business…”

 

Perhaps this time really could be different.

 

Closing Thoughts

Studying Warren Buffett’s stock picks can give us new ideas for our own portfolios and also reinforces sound investing principles to follow.

 

By remaining focused on simple, high quality businesses trading at reasonable prices, we can construct a sound dividend portfolio that can deliver safe, growing dividend income for years to come.

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