Warren Buffett is arguably the greatest investor of all time. He has grown his wealth by investing in and acquiring business with strong competitive advantages trading at fair or better prices. This investment style has served Warren Buffett well – his net worth is now over $70 billion.

A total of 89.5% of Warren Buffett’s portfolio (BRK-A) is invested in dividend stocks. Many of these dividend stocks have paid rising dividends over decades. Warren Buffett prefers to invest in shareholder friendly businesses with long track records of success. It happens that dividend stocks with long histories of dividend increases match what Warren Buffett looks for in a stock investment.

Warren Buffett’s Portfolio

Warren Buffett’s portfolio currently consists of 47 stocks. Of these, 33 are dividend stocks. Warren Buffett’s portfolio as a whole generates a dividend yield of 2.17%; about 15% higher than the S&P 500’s dividend yield.

Warren Buffett’s top 6 holdings make up over 70% of his portfolio. These 6 stocks represent Warren Buffett’s highest conviction picks based on the amount of money he has invested in them. All of his top 6 holdings are dividend stocks. His top 6 holdings have a portfolio weighted dividend yield of 2.53%, well above the average of his portfolio. Three of the top 6 are Dividend Aristocrats.

You can download Warren Buffett’s full portfolio of 47 stocks by clicking the button just below this paragraph. The spreadsheet includes dividend yield and the percentage each stock holding is of Warren Buffett’s total portfolio.

Download Warren Buffett’s Portfolio Here

Warren Buffett’s Top 20 Highest Yielding Dividend Stocks

Each of Warren Buffett’s top 20 highest yielding dividend stocks are analyzed below. Relevant metrics including price-to-earnings ratio, dividend history, current dividend yield, and historical growth rate are shown to give an idea of the relative investment merit of each business. Reviewing Warren Buffett’s highest yielding dividend stocks may give you new ideas on how to improve your portfolio.

20 – Mondelez International (MDLZ)

Dividend Yield: 1.6%
Price-to-Earnings Ratio: 20.9 (using adjusted EPS)
Years of Steady or Rising Dividends: 45 (including history with Philip Morris-PM)
Percent of Warren Buffett’s Portfolio: 0.02%
10 Year Earnings-Per-Share Growth Rate: N/A (due to spin-off)

Mondelez is the global leader in candy, chocolate, and biscuits (cookies). The company is number 2 in the world in gum. Mondelez’ global leadership position in sweet snacks comes from its excellent portfolio of high quality brands (shown in the image below).

 

Mondelez International was named Kraft prior to 2012. In October of 2012, the company spun-off most of its salty/savory North American brands into Kraft Company and renamed itself Mondelez International. The spin-off focused Mondelez on sweet snacks and international growth.

Since the spin-off, Mondelez has been focusing on restructuring its operations for greater efficiency. The company’s earnings-per-share since the spin-off are shown below:

• 2012 Earnings-per-share: $1.40
• 2013 Earnings-per-share: $1.51
• 2014 Earnings-per-share: $1.76

Earnings-per-share have grown 25.7% since the spin-off. Revenue-per-share has grown just 4.6% over the same time period (about in line with inflation). Mondelez’ strong earnings growth is coming entirely from better operating efficiency. Fortunately for shareholders, the company still has plenty of room to reduce overhead, cut waste, and increase operating efficiency. This will result in increased margins and further earnings-per-share growth.

Despite this, fiscal 2015 will likely show earnings-per-share declining due to the strength of the U.S. dollar and the resulting negative currency effects. Over the long-run, Mondelez management believes it can grow constant-currency earnings-per-share around 10% a year. This growth combined with the company’s current 1.6% dividend yield gives investors expected total returns of around 11.6% a year.

Mondelez appears to be trading around the high-end of fair value at this time. The company’s price-to-earnings ratio of 20.9 reflects the company’s low-risk high-quality brands and its growth prospects from further cost-cutting.

19 – Viacom (VIAB)

Dividend Yield: 1.9%
Price-to-Earnings Ratio: 12.9
Years of Steady or Rising Dividends: 6
Percent of Warren Buffett’s Portfolio: 0.57%
10 Year Earnings-Per-Share Growth Rate: 12.7% (8 years used due to CBS spin-off in 2006)

Viacom generates 73% of its revenues from several television networks and 27% of its revenues from its film division which owns Paramount Entertainment. Several of the company’s well known media networks/brands are shown in the image below.

 

Viacom has very little capital expenditures. As a result, the company generates significant free cash flows – which it uses to reward shareholders with dividends and share repurchases. Over the last 5 years, Viacom has repurchased 9.2% of its shares outstanding a year. In addition, the company has a 1.9% dividend yield. Viacom shareholders can expect returns of about 11% a year from share reductions and dividend payments alone, even if Viacom does not grow earnings.

Fortunately for shareholders, Viacom has managed to grow earnings. Over the last 8 years the company has compounded earnings-per-share at 12.7% a year. The company has achieved very solid growth despite negative headwinds from an evolving at-home entertainment industry. Consumers are increasingly ‘cutting the cord’ with cable and switching to pay-as-you-go services like Amazon Instant Video or monthly services that don’t have long-term contracts like Netflix or Hulu. Despite these negative trends, Viacom has maintained impressive earnings-per-share growth both from underlying earnings growth and massive share repurchases.

As a result of the fear around the cable industry as a whole, Viacom’s stock has fallen from grace. The company is currently trading for a price-to-earnings ratio of just 12.92 despite its portfolio of high quality networks and strong growth. The company appears significantly undervalued at this time. Investors in Viacom could very well see strong gains if fears around the changing at-home-entertainment industry subside.

18 – U.S. Bancorp (USB)

Dividend Yield: 2.30%
Price-to-Earnings Ratio: 13.73
Years of Steady or Rising Dividends: 7
Percent of Warren Buffett’s Portfolio: 1.39%
10 Year Book-Value-Per-Share Growth Rate: 7.8%

It is easy to see why Warren Buffett has invested $3.4 billion of Berkshire Hathaway’s portfolio into U.S. Bancorp stock. U.S. Bancorp is the banking industry leader in return on assets, return on equity, and efficiency ratio (the efficiency ratio is calculated as expenses before interest expense divided by total revenue). The image below shows U.S. Bancopr’s industry leading status in these important metrics for fiscal 2014.

Not only is U.S. Bancorp highly profitable, it is also very shareholder friendly. The company targets a dividend payout ratio of 30% to 40% a year and also targets spending 30% to 40% of earnings on share repurchases each and every year. At current price levels, this comes to a shareholder yield of 5.1%. The company has also managed to grow assets at about 7.5% a year over the last decade. With a shareholder yield of ~5% and a 7.5% growth rate, investors can expect total returns of around 12.5% a year from U.S. Bancorp.

U.S. Bancorp currently trades at a price-to-earnings ratio of just 13.73. Banks have traditionally traded at price-to-earnings ratios below those of the overall market due to risk of bank failure and strong competition. U.S. Bancorp has found a way to be more profitable than its peers. In addition, the company remained profitable throughout the Great Recession of 2007 to 2009 – though it did cut its dividend significantly during that period. At its current price-to-earnings ratio, U.S. Bancorp appears to be somewhat undervalued.

17 – M&T Bank Corporation (MTB)

Dividend Yield: 2.34%
Price-to-Earnings Ratio: 16.26
Years of Steady or Rising Dividends: 25
Percent of Warren Buffett’s Portfolio: 0.60%
10 Year Book-Value-Per-Share Growth Rate: 5.4%

M&T Bank Corporation is a bank holding company with 696 locations spread across New York, Pennsylvania, Maryland, Virginia, West Virginia, Delaware, and Washington DC. M&T Bank is one of the few banks that did not cut its dividend payments during the Great Recession of 2007 to 2009. M&T Bank Corporation has grown to become the 16th largest U.S. commercial bank.

M&T Bank Corporation shares many similarities with U.S. Bancorp. Like U.S. Bancorp M&T Bank Corporation maintains higher than industry average returns-on-equity and returns-on assets. Additionally, the company is highly regarded for its conservative nature. M&T Bank Corporation does not over extend itself by writing risky loans.

The company’s conservative nature has produced phenomenal results for long-term shareholders. The company has produced 19.4% annualized total returns for shareholders since 1980, one of the highest of any stocks from that time.

M&T Bank Corporation should experience strong growth over fiscal 2015 due to a more favorable commercial loan market. Rising interest rates also favor the company as they lead to a greater spread on interest earned from deposits versus interest paid. Analysts project the company could grow earnings-per-share by around 20% in fiscal 2015.

Shares of M&T Bank Corporation currently trade for a price-to-earnings ratio of 16.3 and a forward price-to-earnings ratio of 12.4. M&T Bank Corporation appears slightly undervalued using the company’s forward price-to-earnings ratio. The company’s future looks bright and it trades at a reasonable valuation multiple. Additionally, M&T Bank Corporation has a dividend yield of 2.34%, well above the S&P 500’s dividend yield. The company’s combination of stable growth, fair valuation, and solid dividend yield should appeal to dividend growth investors looking for exposure in the banking sector.

16 – Phillips 66 (PSX)

Dividend Yield: 2.47%
Price-to-Earnings Ratio: 11.38
Years of Steady or Rising Dividends: 37 (including history with ConocoPhillips)
Percent of Warren Buffett’s Portfolio: 0.50%
10 Year Earnings-Per-Share Growth Rate: N/A

Phillips 66 was created in 2012 when ConocoPhillips (COP) spun off its downstream, chemical, retail fuel (gas stations), and midstream natural gas divisions. The stock has gained over 30% since lows in early 2015 that resulted from fears about low oil prices. Phillips 66 currently has a market cap of nearly $44 billion.

Phillips 66 refining and chemical divisions stand to benefit from low oil prices. Unlike upstream oil corporations, Phillips 66 is expected to realize record earnings-per-share in fiscal 2015. The company is currently trading at a price-to-earnings ratio of just 11.4. The company’s stock appears to be a bargain at this time.

As a dividend stock, Phillips 66 pays an above average yield of nearly 2.5%. In addition to its above-average dividend yield, Phillips 66 has also been gobbling up its own shares through share repurchases. Since its spin-off in 2012, the company has repurchased about 6% of shares outstanding. The company’s share repurchases combined with its dividend yield give it a shareholder yield of 8.5%.

The company plans to grow through continued expansion in the United States. The company will focus it growth capital expenditures on increasing its midstream and chemical capabilities. Overall, investors in Phillips 66 can expect single digit growth in operations boosted by the company’s aggressive share repurchases and dividend yield for total returns above 10% a year.

Warren Buffett recently added to his position in Phillips 66, showing that he believes in the company’s future despite low oil prices. The company’s low price-to-earnings ratio, high shareholder yield, and reasonable growth prospects bode well for shareholders in Phillips 66.

15 – Wal-Mart (WMT)

Dividend Yield: 2.49%
Price-to-Earnings Ratio: 15.81
Years of Steady or Rising Dividends: 42
Percent of Warren Buffett’s Portfolio: 4.45%
10 Year Earnings-Per-Share Growth Rate: 7.4%

Wal-Mart is the largest retailer in the world with over 1 billion square feet of retail space. The company has over 4,500 stores in the U.S. as well as over 6,700 outside of the U.S. Wal-Mart is Warren Buffett’s 5th largest holding as a percentage of his total portfolio. Wal-Mart is a classic Warren Buffett stock – an industry leader with a strong competitive advantage and a shareholder friendly management.

Wal-Mart’s competitive advantage comes from its massive scale and resulting operating efficiency. The company uses its massive scale to pressures suppliers to lower their prices and then passes savings on to consumers which results in a virtuous feedback loop of improvement. The simplicity of Wal-Mart’s business model is one of its strengths.

The company is very shareholder friendly. Wal-Mart has increased its dividend payments for 42 consecutive years, making it a Dividend Aristocrat. Additionally, the company has repurchased about 2.8% of shares outstanding each year. With its current dividend yield of 2.5% and its historical share repurchases, investors can expect a shareholder yield of about 5% over the long-run from Wal-Mart.

Wal-Mart’s current growth initiatives focus on growing digital sales and building new smaller-store locations to ‘fill-in-the-gaps’ between its larger supercenter stores. Digital sales are growing at 20%+ a year – on a base of $12 billion. Wal-Mart is already one of the largest e-commerce companies in the world, and it still has much room for improvement and growth. The company’s smaller-layout stores are seeing impressive results as well, with neighborhood market stores growing comparable store sales 7% in the company’s latest quarter.

With a price to earnings-ratio under 16, Wal-Mart is a timely purchase. Warren Buffett has invested $4.75 billion of Berkshire Hathaway’s funds into Wal-Mart stock. The company’s future growth plans combined with its shareholder friendly management and fairly low price-to-earnings ratio make a strong combination for dividend growth investors.

14 – Kraft (KRFT)

Dividend Yield: 2.51%
Price-to-Earnings Ratio: 51.01
Years of Steady or Rising Dividends: 45 (including history with Mondelez and Philip Morris)
Percent of Warren Buffett’s Portfolio: 0.02%
10 Year Earnings-Per-Share Growth Rate: N/A

Warren Buffett recently decided to drastically increase his ownership in Kraft Foods. He is teaming up with 3G Capital to merge Kraft with Heinz. Berkshire Hathaway and 3G Capital both own 50% of Heinz. The merger will see Berkshire Hathaway and 3G control a total of 51% of Kraft, with Kraft shareholders owning 49% of the newly combined Kraft-Heinz company.

The merger builds on the success that 3G Capital has realized by purchasing U.S. brands and aggressively expanding them. The same plan worked well with Budweiser and Burger King. 3G Capital merged Burger King with Tim Horton’s to create a new business as well. 3G Capital and Warren Buffett make an ideal team for purchasing and expanding high quality brands in slow changing industries.

In the merger deal, current shareholders of Kraft will receive a one-time special dividend of $16.50. In addition, shareholders will benefit from synergies in the newly formed company as well as from the management expertise of 3G Capital and Warren Buffett. Share repurchases are scheduled to be suspended for 2 years following the merger, but Kraft’s regular dividend will continue.

The combined company will have 8 brands that generate $1 billion or more a year in sales. The combined company is expected to generate about $28 billion in sales per year. Close to $22 billion of those sales will come from North America, making Kraft-Heinz the 3rd largest food and beverage corporation in North America based on sales, behind only PepsiCo (PEP) and Nestle (NSRGY). The infographic below from Kraft’s investor relations shows the combined company’s brands and key statistics.

 

13 – Wells Fargo (WFC)

Dividend Yield: 2.56%
Price-to-Earnings Ratio: 13.41
Years of Steady or Rising Dividends: 6
Percent of Warren Buffett’s Portfolio: 23.73%
10 Year Book-Value-Per-Share Growth Rate: 12.0%

Wells Fargo is now Berkshire Hathaway’s largest holding, and it’s not even close. Warren Buffett has 23.73% of his portfolio allocated to this bank – over 8 percentage points more than his second largest holding (Coca-Cola KO). Wells Fargo has grown to become the largest bank in the U.S. based on its $282 billion market cap.

Wells Fargo’s growth over the last decade has been nothing short of impressive. The company has managed to compound book-value-per-share at 12% a year. Wells Fargo’s growth does not come from unnecessary risks. The company managed to remain profitable throughout the Great Recession of 2007 to 2009 – although it did cut its dividend payments in 2009 and again in 2010. Amazingly, Wells Fargo’s book-value-per-share actually increased in 2008 and 2009 when the financial world was in a full-on meltdown.

Wells Fargo’s operations are divided into 3 primary segments: Community Banking, Wholesale Banking, and Wealth/Brokerage/Retirement. The companies Community Banking segment is its largest, followed by wholesale banking. Together, these 2 segments generate over 90% of Wells Fargo’s income.

The company’s brand is well known by individuals around the United States. Wells Fargo has a carefully honed reputation for trust and good service. This has grown the company to become the number 1 in the U.S. in the following categories:

• Commercial real estate originator
• Middle market commercial lender
• Mortgage originator
• Small business lender
• Auto lender
• Retail deposits

If the Federal Reserve increases interest rates in 2015, Wells Fargo will likely benefit. The company has accomplished its impressive growth run in an era of falling interest rates. When interest rates rise, the company stands to benefit as it can increase the spread on interest earned from deposit accounts versus interest paid on deposits. This makes Wells Fargo a good choice to partially hedge against rising interest rates.

Wells Fargo currently trades for a price-to-earnings ratio of just 13.41 – well below the S&P 500’s price-to-earnings-ratio. Wells Fargo is clearly superior to both the average bank and the average business in the S&P 500. The company’s low price-to-earnings ratio is very reasonable and is a good entry point for dividend growth investors looking to start a position in this market-leading bank.

12 – IBM (IBM)

Dividend Yield: 2.62%
Price-to-Earnings Ratio: 10.82
Years of Steady or Rising Dividends: 23
Percent of Warren Buffett’s Portfolio: 12.11%
10 Year Earnings-Per-Share Growth Rate: 12.9%

Warren Buffett is known to avoid technology stocks. He has repeatedly discussed preferring slow changing industries and simple-to-understand businesses. Competitive advantages in slow changing industries tend to last much longer than those in fast changing industries. Warren Buffett first began purchasing shares of IBM in 2011 – which shocked the investing world as it deviated from his long-time approach of skipping over technology companies.

IBM’s long history of profitability sets it apart from many other technology companies. IBM was founded in 1911 and has grown over the last 100+ years to reach a market cap of $168 billion. IBM realized strong earnings-per-share growth of 12.9% a year over the last decade. This growth was largely a result of increased operating efficiency and resulting margin enhancement. The company saw revenue grow at 5.5% a year over the same time period.

IBM has struggled recently. The company is repositioning itself for growth. It recently divested its System X (mainframes) and Customer Care business segments. IBM is divesting itself of lower margin businesses and investing several billion dollars into areas it believes offer much better growth potential: cloud computing, mobile computing, analytics, and information security. The company saw 16% growth in these key areas from 2013 to 2014 – they now generate $25 billion a year in revenues. IBM’s goal is to boost revenue in these 4 growth segments to $40 billion by 2018.

Like many of Warren Buffett’s other top dividend stock holdings, IBM is a shareholder friendly business. The company currently has a 2.6% dividend yield. Additionally, IBM has repurchased about 5% of its shares outstanding each year over the last decade for a total shareholder yield of 7.6%.

Poor recent performance has caused IBM’s price-to-earnings ratio to fall significantly. The company is currently trading at a price-to-earnings ratio of just 10.8. The company appears significantly undervalued at these prices given strong growth in its cloud, mobile, analytics, and information security segments.

11 – Suncor Energy (SU)

Dividend Yield: 2.70%
Price-to-Earnings Ratio: 21.99
Years of Steady or Rising Dividends: 24
Percent of Warren Buffett’s Portfolio: 0.69%
10 Year Earnings-Per-Share Growth Rate: 3.6%

Suncor Energy is one of Canada’s leading oil sands companies. The company generates the bulk of its earnings from the exploration, acquisition, development, transport, and refining of oil sands. Suncor Energy has a market cap of $47.8 billion and was founded in 1917. The company has paid steady or increasing dividends (in Canadian Dollars) for 24 consecutive years.

Suncor Energy’s investing thesis is very simple. The company is one of North America’s lowest cost oil producers thanks to exposure to the Canadian oil sands. The company’s cash operating costs to produce a barrel of oil from its oil sands operations is just $33.80. Suncor Energy has significantly increased production from oil sands over the last several years. In addition, the company is focusing on cost control to further reduce its cash operating costs of production. The image below shows the company’s positive trends in both increasing oil sands production and decreasing oil sands costs from the company’s investor presentation.

 

Over the past 4 years, Suncor Energy has repurchased about 1% of its shares outstanding each year. In addition, the company has a 2.7% dividend yield for total shareholder yield of 3.7%. Shareholders in Suncor Energy should see solid earnings-per-share growth when oil prices recover. In the meantime, the company will remain profitable despite low oil prices thanks to its low cost of production.

The downside to investing in Suncor Energy is its high price-to-earnings ratio as compared to other oil companies. Suncor Energy is currently trading for a price-to-earnings ratio of about 22, well above most of its oil peers.

10 – Deere & Company (DE)

Dividend Yield: 2.72%
Price-to-Earnings Ratio: 11.52
Years of Steady or Rising Dividends:
Percent of Warren Buffett’s Portfolio: 1.41%
10 Year Earnings-Per-Share Growth Rate: 12.7%

Deere & Company is the largest manufacturer of farming machinery in the world.   Deere & Company also manufactures forestry and construction equipment. In addition, the company operates a financing division to help customers finance expensive equipment.

Deere & Company is one of Warren Buffett’s most recent purchases. The company is a timely buy as it is nearing its cyclical trough which historically reduces the company’s earnings and share price. This gives long-term investors a chance to pick up shares of this high quality business for a discount. With a price-to-earnings ratio of just 11.5, Deere & Company appears to be significantly undervalued. Peak earnings during the company’s last cyclical peak were $9.08 per share. During the next peak, the company should see earnings-per-share of at least $10 per share. The company has traditionally had a price-to-earnings ratio of around 10 during peak earnings years which will result in a share price of at least $100 when the company reaches its cyclical peak. At current price, Deere & Company is likely undervalued by at least 10%.

The company’s competitive advantage comes from its brand recognition and reputation for quality in the farming machinery industry. Deere & Company’s competitive advantage has given it a 60% market share of the farming equipment industry in the US and Canada.

Long term growth prospects are bright for Deere & Company. Increased affluence and population growth in emerging markets will likely drive demand for food, grains, and farming equipment globally. Over the last decade, Deere & Company has averaged EPS growth of over 12% a year. The company should continue to grow EPS at a double-digit rate over full market cycles going forward. This will result in more-than-satisfactory returns for shareholders. In addition to solid growth, Deere & Company currently has a dividend yield of around 2.7%, which provides current income for dividend stock investors.

9 – Johnson & Johnson (JNJ)

Dividend Yield: 2.80%
Price-to-Earnings Ratio: 17.97
Years of Steady or Rising Dividends: 53
Percent of Warren Buffett’s Portfolio: 0.03%
10 Year Earnings-Per-Share Growth Rate: 6.1%

Johnson & Johnson is the world’s leading diversified health care company based on its $279 billion market cap. The company has grown earnings-per-share each year for 31 consecutive years – which is absolutely amazing. In addition, the company has paid increasing dividends for 53 consecutive years. Johnson & Johnson is one of the most safe and stable stocks in which to invest for long-term dividend growth.

A company cannot grow earnings-per-share for over 3 decades without a strong and lasting competitive advantage. The company has a portfolio of strong consumer brands including: Aveeno, Neutrogena, Band-Aid, Bengay, Neosporin, Listerine, Tylenol, Motrin, Benadryl, Mylanta, Zyrtec, Nicorette, Pepcid, Splenda, and Visine, among others. In total, the company’s consumer products generate about 20% of total revenues for the company.

Johnson & Johnson’s biggest profitability driver is its pharmaceutical divisions, which is responsible for over 40% of company revenue. Johnson & Johnson has a strong competitive advantage in this segment as well. The company’s research and development department and intellectual property portfolio help the company to keep its drug pipeline full. Johnson & Johnson’s massive size and strong cash flows give it a large research and development budget that smaller companies cannot match.

The company’s third segment is Medical Devices and Diagnostics. The segment is slightly smaller than the company’s pharmaceutical segment. The Medical Devices and Diagnostics segment develops, manufactures, and sells medical devices for the following medical fields: cardiovascular, diabetes, diagnostics, orthopedics, surgery, and vision.

Johnson & Johnson is currently trading for a price-to-earnings ratio of just under 18. The company is slightly cheaper than the S&P 500 despite being of a much higher quality than the average business. Johnson & Johnson will not deliver rapid growth for shareholders – earnings-per-share have grown at just over 6% a year over the last decade. With that said, the company does have a solid dividend yield of 2.8% and scores very high marks for safety.

8 – United Parcel Service (UPS)

Dividend Yield: 2.99%
Price-to-Earnings Ratio: 20.68
Years of Steady or Rising Dividends: 32
Percent of Warren Buffett’s Portfolio: 0.01%
10 Year Earnings-Per-Share Growth Rate: 3.6%

United Parcel Service is the largest publicly traded freight and delivery company in the world based on its $88.6 billion market cap. The company was founded in Seattle in 1907 and has grown to become a global business with close to 2,000 operating facilities and nearly 100,000 vehicles in its fleet.

The larger a delivery network gets, the stronger its competitive advantage becomes as it can ship anywhere in the world – often for less thanks to scale advantages. As the largest freight company in the world, United Parcel Service has a strong competitive advantage that will likely get strong as time goes by. The mail industry in the U.S. is an oligopoly largely dominated by just 3 players: Fed Ex (FDX), United Parcel Service, and the U.S. Post Office. Of the three, only the two publicly traded companies are profitable.

Online retail will continue to drive growth for United Parcel Service going forward as the company benefits from increased package shipments. Online retail is expected to grow about 4x as fast as global GDP over the next several years. The image below from UPS’ latest investor presentation shows this growth:

 

In addition to tailwinds from e-commerce growth, United Parcel Service is also benefitting from growth in emerging markets. The company has focused on expanding its international reach over the last 20 years. As global commerce grows, United Parcel Service stands to gain from increased shipments between countries. In total, the company is expecting 6% to 12% EPS growth for fiscal 2015.

United Parcel Service is a low-risk business in a fairly slow-changing industry. The company’s price-to-earnings ratio reflects the company’s strong competitive advantage and solid growth prospects. In addition, United Parcel Service is a shareholder friendly business. The company has several decades of rising dividends, and has reduced its share count by an average of 2% a year over the last decade.

7 – Procter & Gamble (PG)

Dividend Yield: 3.14%
Price-to-Earnings Ratio: 23.81
Years of Steady or Rising Dividends: 59
Percent of Warren Buffett’s Portfolio: 4.05%
10 Year Earnings-Per-Share Growth Rate: 5.8%

At the time of this writing, Warren Buffett had agreed to exchange his $4.32 billion worth of Procter & Gamble shares for Duracell. Procter & Gamble is going through a transition. The company is shedding its non-core and underperforming brands to streamline operations and focus on the company’s core brands.

As a result of this transition, Procter & Gamble decided to part with its Duracell brand. Warren Buffett agreed to facilitate the Duracell transaction. In the deal, Berkshire Hathaway will exchange its 52.79 million Procter & Gamble shares valued at $4.32 billion for the Duracell division. Procter & Gamble is also contributing about $1.8 billion in cash to Duracell before the spin-off. This deal is expected to close in the second half of fiscal 2015. The transaction values Duracell at about 7x 2014 EBITDA. For comparison, Procter & Gamble is currently trading at around 11.9x fiscal 2014 EBITDA.

The Procter & Gamble – Duracell swap works well for Berkshire Hathaway. The deal allows Warren Buffett to exit his position in Procter & Gamble tax-free. The $1.8 billion in cash Duracell is receiving will come to Berkshire Hathaway tax-free as it is ‘part’ of Duracell.

Procter & Gamble has performed well since refocusing its operations on core brands. The company’s most recent earnings release shows constant-currency core earnings-per-share up 10% versus the same quarter a year ago. The company’s growth in earnings is being fueled by increasing operating efficiency and cost-cutting. Despite solid growth prospects and a shareholder friendly management, Procter & Gamble appears somewhat overvalued at this time with a price-to-earnings ratio near 24.

6 – Sanofi (SNY)

Dividend Yield: 3.17%
Price-to-Earnings Ratio: 25.43
Years of Steady or Rising Dividends: 21 
Percent of Warren Buffett’s Portfolio: 0.19%
10 Year Earnings-Per-Share Growth Rate: 2.5%

Sanofi is a global pharmaceutical company with a market cap of $136.7 billion. The company is headquartered in Paris, France. In 2014, Sanofi generated 82% of revenue from pharmaceuticals, 12% from vaccines, and 6% from animal health products. The company has heavy exposure to emerging markets, with 36% of 2014 sales coming from these markets.

Sanofi has grown to reach a market cap well over $100 billion thanks to its strong research and development department. The company’s ability to roll out new and innovative treatments drives revenue. Fortunately for shareholders of Sanofi, the company’s number of product launches is increasing. From 2007 to 2013, the company launched 10 products. From 2014 to 2020, Sanofi is expecting 18 product launches. The image below from the company’s most recent presentation shows the company’s expected launches to 2020.

 

Sanofi is a shareholder friendly company. The company has increased its dividend payments each year for the past 21 years (measured in Euros, not USD). The company has recently begun to focus on share repurchases recently. Sanofi has reduced its net share count by about 1% in the last 2 years – with most of that coming last year. Sanofi will likely continue to increase share repurchases to increase the value of each share. Sanofi’s 3.17% dividend yield combined with its share repurchase makes for a shareholder yield of about 3.7% a year.

Sanofi’s current price-to-earnings ratio of 25.43 is somewhat higher than other high quality pharmaceutical companies. The company is expecting solid growth from its new launches over the coming several years. Nevertheless, Sanofi shares are likely somewhat overvalued at this time.

5 – Coca-Cola (KO)

Dividend Yield: 3.21%
Price-to-Earnings Ratio: 20.01 (using adjusted earnings)
Years of Steady or Rising Dividends: 53
Percent of Warren Buffett’s Portfolio: 15.40%
10 Year Earnings-Per-Share Growth Rate: 7.2%

Coca-Cola is Warren Buffett’s second largest holding (behind Wells Fargo). Berkshire Hathaway has $16.44 billion invested in Coca-Cola. Coca-Cola is the global leader in ready-to-drink beverages. The company has 20 brands that generate $1 billion or more per year in sales, and the Coca-Cola soda brand is the most popular in the world by a wide margin.

Coca-Cola has increased its dividend payments for over 5 decades. The company clearly possesses a strong competitive advantage. Coca-Cola’s competitive advantage stems from its powerful brands. The company supports its brands by spending over $3 billion per year on advertising. Coca-Cola can spend more on advertising than any other beverage company (except for perhaps PepsiCo), which further reinforces its competitive advantage.

Going forward, Coca-Cola’s earnings-per-share growth will come from a mix of global expansion and operating efficiency increases. The company is using its global distribution power to leverage popular smaller drink brands and sell them worldwide. An example of this is the company’s acquisition of Monster’s non-energy drink brands like Hubert’s Lemonade and Hanson’s juice drinks.   Coca-Cola is taking several steps to improve operating efficiency, including:

• Refranchise U.S. bottling operations
• Decentralize decision making
• Better align employee incentives with company goals

The company’s earnings-per-share growth plans are working. Coca-Cola’s 1st quarter results showed currency-neutral operating income per share grew 13% versus the same quarter a year ago. Despite being an old company, Coca-Cola still has plenty room for growth. In addition, the company is very shareholder friendly. Coca-Cola currently has a high dividend yield of 3.2% to go with solid share repurchases. Over the last 5 years, the company has repurchased about 1.2% of shares outstanding. Share repurchases combined with the company’s dividend gives investors a shareholder yield of about 4.4%. Total returns for Coca-Cola should be over 10% going forward from dividends (3.2%) and earnings-per-share growth (7% or more per year).

4 – National Oilwell Varco (NOV)

Dividend Yield: 3.35%
Price-to-Earnings Ratio: 9.80
Years of Steady or Rising Dividends: 6
Percent of Warren Buffett’s Portfolio: 0.27%
10 Year Earnings-Per-Share Growth Rate: 23.9%

National Oilwell Varco’s stock price has fallen 23% in the last year due to the decline in oil prices. This has driven down the company’s price-to-earnings ratio, which is now just 9.80. National Oilwell Varco is the largest supplier of equipment for oil and gas drilling. The company has a market cap of $22 billion. National Oilwell Varco’s percentage of total fiscal 2014 revenue by segment is shown below:

• Rig Systems: 42%
• Rig Aftermarket: 14%
• Wellbore Technologies: 24%
• Completion & Product Solutions: 20%

Low oil prices will have a direct impact on National Oilwell Varco’s earnings in fiscal 2015. The company’s customers will purchase less rig and drilling systems and equipment as a result of low oil prices and resulting falling capital expenditure budgets. Fortunately, National Oilwell Varco’s management is approaching falling share prices with the right attitude. The company’s management plans to use the company’s solid balance sheet to repurchase shares at depressed prices. This will be a significant victory for long-term shareholders as share repurchases when a stock’s price is depressed generate significant value.

National Oilwell Varco currently has $3.146 billion in total debt and $4.091 billion in cash on hand. Very little of the company’s debt is due in 2015. With its current cash hoard, National Oilwell Varco has plenty of ‘dry powder’ to repurchase shares with.

Like many of Warren Buffett’s other dividend stocks, National Oilwell Varco is an industry leader. The company is trading well below fair value with a price-to-earnings ratio under 10. Management is very shareholder friendly and is adept at capital allocation. The company currently sports a 3.35% dividend yield; investors get ‘paid to wait’ for the company’s price-to-earnings ratio to rise – which will likely happen when oil prices increase.

3 – General Motors (GM)

Dividend Yield: 3.35%
Price-to-Earnings Ratio: 11.64
Years of Steady or Rising Dividends: 1
Percent of Warren Buffett’s Portfolio: 1.37%
10 Year Earnings-Per-Share Growth Rate: N/A

General Motors famously declared chapter 11 bankruptcy in 2009. Since restructuring and going public again in 2010, the company has been profitable every year and even managed slight earnings-per-share growth averaging 1.4% a year. General Motor’s is the United States largest automobile manufacturer. The company has around 17% market share in the United States car and truck market. Around 40% of the company’s revenue is now generated overseas, in addition to its North American operations.

General Motors has strong growth prospects ahead. The company is realizing higher operating income margins now thanks to its focus on cost control. The company is seeing solid growth in its joint venture in China. China sales grew 12.1% in fiscal 2014. Growth in China should come in slower this year due to the slow-down in the company’s economy. General Motors operates in the highly competitive automobile industry. The company declared bankruptcy in 2009. Since restructuring, it has been able to keep pace with the industry, but growth has been very slow. Bottom line growth is increasing at just 1.37% a year since the restructuring, while revenue growth has 2.7%; about in line with inflation.

General Motors’ high dividend yield and low price-to-earnings ratio should appeal to value oriented investors. The company has a low payout ratio of about 40%. General Motors will likely increase dividend payments in excess of its earnings-per-share growth rate over the next several years. If General Motors were to experience better earnings-per-share growth, it would do well for investors. The company’s Chevrolet Volt EV concept – which has a 200 mile range – could potentially drive growth for the company in the future. Additionally, the company is currently restructuring operations in Russia, Thailand, and Indonesia. Cost savings from these restructurings should provide a small boost to earnings as well in the coming years.

2 – General Electric (GE)

Dividend Yield: 3.43%
Price-to-Earnings Ratio: 16.25
Years of Steady or Rising Dividends: 6
Percent of Warren Buffett’s Portfolio: 0.27%
10 Year Earnings-Per-Share Growth Rate: -1.0%

General Electric is one of the world’s largest conglomerates based on the company’s $270 billion market cap – although it falls about $80 billion short of Warren Buffett’s Berkshire Hathaway.

General Electric shareholders will likely see strong returns over the next few years. The company is committed to divesting its GE Capital business and return somewhere around $90 billion to shareholders through dividends and share repurchases. This is about 33% of the company’s value at current prices.

General Electric spun-off its retail finance and credit card division recently, which is now named Synchrony Financial (SYF). There are rumors that General Electric will soon sell its commercial lending portfolio to Wells Fargo (Warren Buffett’s largest holding) for up to $74 billion. If this transaction does occur, General Electric will have mountains of cash to return to shareholders.

The divestiture of GE Capital is a positive sign for General Electric shareholders. The company is focusing on what it does best – manufacturing a diverse range of products, and selling everything else to generate cash. When a management team actively seeks to make the company smaller to reward shareholders, there is a high likelihood that shareholders will see strong gains as the company regains its focus.

General Electric currently trades at a reasonable price-to-earnings ratio of 16.25. Additionally, the company has a strong 3.4% dividend yield. Investors in General Electric today will likely do much better than they have done over the last decade thanks to the company’s reasonable price-to-earnings ratio, high dividend yield, and large divestiture plans.

1 – Verizon (VZ)

Dividend Yield: 4.43%
Price-to-Earnings Ratio: 14.98
Years of Steady or Rising Dividends: 31
Percent of Warren Buffett’s Portfolio: 0.70%
10 Year Earnings-Per-Share Growth Rate: 7.5%

Verizon is the highest yielding stock in Warren Buffett’s portfolio with its dividend yield of 4.4%. The company is also the leader in wireless in the United States. Verizon controls 34% of the wireless market in the U.S., with AT&T (T) controlling another 31%. Verizon, AT&T, T-Mobile (TMBLP), and Sprint (S) together account for 90% of the wireless industry in the United States. The oligopolistic wireless industry is not good for consumers – but great for the businesses in the industry which reap higher-than-normal profits from the lack of competition.

Verizon is focused on returning value to shareholders. The company recently announced it plans to sell its wireline assets in California, Florida, and Texas to Frontier Communications (FTR) for $10.54 billion. The move helps Verizon reduce its exposure to its slower growing wireline segment. Verizon also agreed to lease the rights to over 11,300 of its company owned towers to American Tower Corporation (AMT), as well as sell American Tower Corporation 130 towers for an upfront payment of $5 billion. Verizon is using $5 billion of this cash to repurchase shares. This comes to a 4% reduction at current prices.

In addition to its intelligent strategic moves, Verizon is seeing strong growth in its wireless segment. The company is benefiting as more-and-more consumers use increasing amounts of data on their smart phones and tablets. The trend toward more data has given Verizon a 7.5% earnings-per-share growth rate over the last several years.

Investors in Verizon should expect total returns of close to 12% a year from the company. Total returns will come from dividends (~4.4%) and earnings-per-share growth (~7.5%). Verizon appears fairly valued or slightly undervalued at this time with its price-to-earnings ratio of just under 15.

Final Thoughts

Warren Buffett is possibly the greatest investor of all time. His portfolio is loaded with ultra-high quality businesses that are likely to compound shareholder wealth over long periods of time. With that said, being a prudent investor requires more than copying Warren Buffett’s every move. Instead, intelligent investors should learn from Warren Buffett and analyze his investments themselves to see if each matches your personal investing style.  Examining the highest yielding stocks in Warren Buffett’s portfolio is an excellent place to look for candidates to include in your dividend growth portfolio.