Warren Buffett likes stocks with good dividend growth. These companies consistently increase their profits year after year and choose to return these higher profits to shareholders.
A company capable of doing this probably has a lot of the characteristics Buffett looks for in a company. And when these stocks trade at fair value, they can deliver exceptional returns to shareholders.
Dividend producers and initiators generated an average return of 10.24% over the 50 years from 1973 to 2022, according to a Hartford Funds study. In comparison, non-payers increased by only 3.95%. This might help explain Buffett’s strange performance as CEO of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B)significantly outperforming the S&P500 index during this same period.
The good news is that you can copy Buffett’s strategy. Berkshire Hathaway’s stock portfolio is publicly available through information required by the Securities and Exchange Commission. Here are three dividend growth stocks in the portfolio that you can buy now and hold forever.
Buffett first purchased shares of Apple (NASDAQ:AAPL) in 2016, and it became Berkshire Hathaway’s largest stock holding by far.
It’s easy to see why Buffett is a fan of Apple and its dividends. The iPhone is a cash generating machine. Apple’s dominance of the premium smartphone sector is unlikely to change anytime soon, and its ability to generate more and more revenue for each user over time through its growing services business is fueling its net growth.
Apple offers a generous principal repayment program. It reinstated its dividend in 2012 after suspending it in the mid-1990s. It has increased its dividend every year since.
But what is more impressive is its share buyback program. The company has repurchased more than $600 billion of his own actions over the past decade. This supported strong earnings per share growth and gave investors confidence in the stock price.
Management intends to achieve net cash neutrality over time, where the cash on its balance sheet is equal to the amount of debt it holds. It currently has net cash of approximately $45 billion. On top of that, it now generates around $100 billion in free cash flow per year. So it’s likely that there will be many more dividend increases in the future as Apple aims to return most of its cash to shareholders.
The stock is currently trading at about 32 times higher than forward earnings estimates. But given its massive share buyback plan and substantial net cash, it deserves to trade at a premium. Despite the high price, dividend growth investors should consider Apple stock for their portfolio.
Buffett has held shares of Visa (NYSE:V) in Berkshire’s portfolio for over a decade. Not only has the stock outperformed the market during this period, but Visa has also increased its dividend every year since.
Visa enjoys a classic competitive advantage – a central point for Buffett in his analysis of a company. The payment network is the largest in the world, making it a preferred choice for banks looking to issue a new credit card, especially one that is accepted internationally.
The only other network that comes close is MasterCard, another Berkshire holding. It will take years, if not decades, for a company trying to build a payments network from scratch to get anywhere near Visa or Mastercard.
The current shift away from cash payments to digital payments is a major boon for Visa. Because Visa has already done the hard work of setting up the payments network, the pennies Visa makes from every additional dollar it makes go virtually straight to its bottom line.
Management returns almost all of its growing free cash flow to investors through its dividend and share repurchase program. And the capital return program remains heavily focused on share buybacks. The board recently authorized $25 billion in multi-year stock repurchases. By comparison, it paid out just $3.75 billion in dividends last year.
But with nearly $20 billion in annual free cash flow, there are plenty of opportunities to increase the dividend, as has been the case every year since going public in 2008. The shares currently trade at a P /E forward of only 26, a reduction from their value. historical valuation as well as its smaller rival Mastercard (which trades at around 30 times forward earnings).
T-Mobile United States (NASDAQ:TMUS) is a relatively recent addition to Berkshire Hathaway’s portfolio. Buffett first bought shares in 2020, following the merger with Sprint.
The merger gave T-Mobile significant spectrum assets to fuel its 5G network development, helping it become a leader among wireless network operators. This has led to sustained gains in market share, an increase in average revenue per account and a booming home internet business.
But the real story for T-Mobile is its growth in free cash flow (FCF). It generated more than $4 billion in adjusted FCF last quarter and expects to produce between $13.4 billion and $13.6 billion in FCF for the full year. Next year, management is targeting $18 billion in FCF. That will put it on par with older competitors in the space, as they work to catch up to T-Mobile’s network while paying down debt.
T-Mobile’s strong FCF growth has allowed it to repurchase shares at a substantial rate. It announced a $14 billion share repurchase program at the end of 2022 and added another $19 billion to total shareholder returns in September 2023.
This latest authorization includes a new dividend that management intends to increase at an annual rate of 10% for the foreseeable future. And with its strong FCF outlook and substantial buybacks underway, there’s no reason to doubt its ability to deliver on that promise.
With shares trading at less than 16 times analyst estimates for 2024 earnings despite strong earnings growth prospects, T-Mobile stock appears to be a great opportunity for investors.
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Adam Levy holds positions at Apple, Mastercard and Visa. The Motley Fool holds positions and recommends Apple, Berkshire Hathaway, Mastercard and Visa. The Motley Fool recommends T-Mobile US and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
3 Warren Buffett Dividend Growth Stocks to Buy Now and Hold Forever was originally published by The Motley Fool