I’m following Warren Buffett and buying cheap dividend shares to build my wealth

I think this cheap dividend stock exhibits similar qualities to the companies Warren Buffett has in his investment portfolio.

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Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

Since the 1940s, Warren Buffett has built up a huge amount of wealth in the stock market for himself and later for Berkshire Hathaway shareholders. Yet despite his impressive track record, the Oracle of Omaha uses a really simple strategy – he buys wonderful businesses at attractive prices.

Today the stock market is filled with countless high-quality dividend-paying businesses. And thanks to the current economic turmoil, plenty of these dividend shares look dirt-cheap to me. So, let’s explore how I might achieve Buffett-like returns for my portfolio using the same strategy.

The Warren Buffett method

Investing in wonderful businesses is easy. The hard part is finding them among an ocean of mediocre stocks. After all, not all shares on the stock market will deliver the wealth-generating returns I’m looking for. So, how does Warren Buffett do it?

Looking at his investing record, he tends to prefer what many consider to be boring blue-chip companies rather than the more exciting small-cap stocks. Why? Because these businesses tend to have strong balance sheets and already possess an industry-leading market share.

Those are undoubtedly desirable traits when looking to invest in reliable dividend shares. But plenty of industry titans have been terrible performers over the years. So, how can an investor like me determine which ones will continue to dominate moving forward? The answer is competitive advantages.

A competitive advantage is an upper edge a business has over its peers. This could be from something as simple as a strong brand or as unique as an irreplicable production approach. With each advantage, a firm can charge more or spend less to generate a profit. The result is margin expansion – another desirable trait when looking for cheap dividend shares.

The best cheap dividend stocks to buy now?

With Warren Buffett’s criteria laid out, what are some of the best cheap dividend shares I can add to my portfolio today? One that’s recently caught my attention is Howden Joinery (LSE:HWDN). The group is a vertically integrated designer and manufacturer of fitted kitchens.

That’s hardly the most exotic business out there. Yet it’s one that’s proved to be increasingly profitable over the years. Howden deals directly with tradespeople from a network of over 800 depots across the UK and continental Europe. And today, it controls roughly a third of the industry market share.

There are obviously other companies like it. But what I believe makes the group unique is its logistics infrastructure. In 2020, management introduced XDC warehouses. These facilities can replenish the stock of local depots within 24 hours. Subsequently, while most of the industry has been suffering from supply chain disruptions, Howden has been thriving.

Fears of a recession have dragged the P/E ratio down to 11, into seemingly cheap territory. That’s understandable since an economic slowdown probably won’t encourage kitchen renovations or home construction. But with this factor already baked into the stock price, paired with a 3.2% dividend yield, Howden Joinery shares look cheap in my eyes. And in my opinion, it’s the kind of business Warren Buffett might consider worthy of investment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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