When investor Warren Buffett buys shares, he is usually looking at the long-term growth potential of the business in question. But such a savvy investor also knows that a company with attractive economic characteristics can often produce enough profits to fund an attractive dividend. Here are two Warren Buffett shares I would consider adding to my own portfolio. I like their business potential — and each currently pays a dividend.
The biggest shareholding of Buffett’s firm Berkshire Hathaway is in tech giant Apple (NASDAQ: AAPL).
The tech giant has many of the characteristics Buffett looks for when investing in a business. For example, he talks about the need for a business to have a ”moat” to help protect it from competitors. Apple’s unique operating system, iconic brand and ecosystem of services all help it maintain such a moat. That allows it to charge a premium price, supporting profits that hit an incredible £72bn last year. Some investors worry that increasing competition could push down profit margins in future. That is definitely a risk. Then again, Apple’s moat may mean these Warren Buffett shares actually benefit from higher earnings in future.
On top of that, Apple pays a dividend. The yield is currently 0.5%. That is small, but it is worth noting that the company has increased its dividend annually in recent years. It has doubled over the past eight years. Dividends are never guaranteed, but Apple’s huge cash flows mean that for now at least, it can comfortably fund both dividends and share buybacks.
While Apple remains in strong growth mode, not all Warren Buffett shares are in the same situation. For example, he holds US telecom company Verizon (NYSE: VZ). Its revenues grew by a total of just 6% over the past five years. Operating income in that period actually slid a little bit.
But while a mature business may not offer good growth prospects, it might be able to generate substantial free cash flows and support a big dividend. At Verizon, for example, the dividend yield stands at 5%. This means that for every pound I put into Verizon shares today, I would hope to earn 10 times as much in dividends next year as for each pound I put into Apple.
Warren Buffett shares
If Verizon’s dividend is so much stronger than Apple’s, why would I consider buying both companies for my portfolio? Indeed, why does Buffett hold both?
I think the answer to that question reveals a lot about the Sage of Omaha’s considered approach to investing. Verizon enjoys only limited growth prospects in the short term. It also faces risks such as network installation costs eating into profitability. But it remains a cash generation machine. Its business may well churn out profits for decades – which could support meaty dividends.
Apple’s dividend is much smaller, for now at least. But it too is a cash generation machine. While Apple’s business may seem more modern than Verizon’s, they both benefit from similar trends. After all, a sizeable number of Verizon’s 143m subscribers are using the company’s service to access their iPhones. Both of these Warren Buffett shares benefit from business moats that enable massive cash flows. That is why I would consider them for my own portfolio.