Warren Buffett’s holding company, Berkshire Hathaway (NYSE:BRK.A, BRK.B), has generally provided very strong returns for the owners of its stock. For example, over the last ten years, the shares have generated a return of 197%. So buying some of the high-quality stocks that Buffett owns is certainly a worthwhile strategy, especially for those who, like Buffett, focus on buying high-quality value stocks. In this column, I’ll outline three of the best dividend stocks in Warren Buffett’s portfolio.
Buying dividend stocks is a cornerstone of Buffett’s strategy. That makes sense since these equities pay investors to wait during the times when their stock prices are dropping. Further, dividend stocks’ payouts can be used to buy more of their shares, resulting in a compounding of investors’ total returns.
These three dividend stocks that Warren Buffett owns give investors those advantages. And not surprisingly, since Buffett owns them, their businesses and balance sheets are strong, while their valuations are attractive.
American Express (AXP)
In a May 9 article, Bloomberg reported that pleasure cruise operators Royal Caribbean (NYSE:RCL) and Norwegian (NYSE:NCLH) have been “reporting smooth-sailing quarters.” Given those companies’ strong, recent financial results, Bloomberg, whose own commentators have generally been quite bearish about the U.S. economy, conceded that “it’s hard not project some cautious optimism about the US consumer.”
The fact that even the pessimistic news service is becoming somewhat upbeat on consumer spending indicates, in my opinion, that such spending is indeed growing quite rapidly, while the trend will probably continue for a long time. And that, in turn, is good news for one of the dividend stocks that Warren Buffett owns, American Express (NYSE:AXP).
Of course, AXP is a credit card network that generates revenue every time a consumer uses one of its cards to make a purchase.
Last quarter, AXP’s net income jumped almost 50% year-over-year, excluding a large surge in ” its credit loss provisions.”
The stock has a low forward price-earnings ratio of 13.8 and a significant dividend yield of 1.57%.
Louisiana Pacific (LPX)
Louisiana Pacific (NYSE:LPX) “produces materials used in new home construction.”
In March, I predicted that the housing sector would improve in “the medium term,” and that scenario appears to be materializing, making it one of the best dividend stocks in Warren Buffett’s portfolio. Indeed, Yahoo Finance recently reported that “home prices…have unexpectedly ticked higher month over month since the beginning of the year. “
With housing prices climbing, builders will create more homes, and they will have to buy more of LPX’s products in order to do so.
On the company’s first-quarter earnings call, held on May 3, LPX CEO Brad Southern said, “We are currently seeing encouraging signs of strength in housing, including improving commodity prices.”
On May 4, TD Securities raised its rating on LPX to “buy” from “hold.” The firm expects the margins of the company’s siding business to rebound and anticipates that the company’s profits will increase in the last three quarters of the year versus Q1. It raised its price target on the shares to $75 from $63.
LPX has a very low trailing price-earnings ratio of 5.5 and a significant dividend yield of 1.5%.
HP Inc (HPQ)
As I pointed out in a previous column published in April, “While…PC…sales slowed last year as consumers turned to “experiences” over the internet, the latter trend should ease soon as consumers’ need for experiences is partially satiated by the end of 2023.”
Agreeing with my assessment, Morgan Stanley in February wrote that the sector could be nearing a “bottom,” and on May 5, the firm informed investors that it “believes that the PC market [formed] a bottom” in Q1. Similarly, AMD (NASDAQ:AMD) forecast in January that PC sales would rebound later in the year.
In conjunction with its May 5 note, Morgan Stanley upgraded HP to “equal weight” and raised its price target on HPQ stock to $31 from $28.
HP has a large dividend yield of 3.5% and a low trailing price-earnings ratio of 11.9 times.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.