Over the past seven decades, Warren Buffett has made a tremendous fortune for himself and his investors. He’s done this by following a simple strategy based around buying good quality companies at attractive prices.
I believe it may be possible to achieve Buffett-like returns following a similar strategy of buying cheap dividend shares.
The Warren Buffett approach
Buffett may be one of the world’s best investors, but his approach to picking stocks is relatively straightforward.
He has always been interested in buying high-quality companies. These businesses generally have strong balance sheets and sustainable, competitive advantages. These advantages allow them to make higher-than-average profit margins and ensure competitors don’t steal market share.
Warren Buffett has also tended to stay away from small-cap stocks. Instead, he has gravitated towards blue-chip cheap dividend shares.
I think the reason why the ‘Oracle of Ohama’ has tended to stay away from smaller companies is that they’re more unpredictable. You can make a lot of money in small-caps, but you can also lose a lot of money. Warren Buffett doesn’t like to lose money.
That may be why Buffett likes cheap dividend stocks. The investor wants to stick with established blue-chips, companies that already have a good track record of producing large returns for investors. By following this approach, he’s been able to limit losses while increasing profits.
Cheap dividend stocks
There are plenty of undervalued income stocks available to buy right now. Buffett likes to target companies with a strong competitive advantage, like Hargreaves Landsdown. This is one of the largest and best-known low-cost online stock brokers in the country.
Over the past decade, it’s established an outstanding reputation among investors for providing a good service at a low cost. As investors have flocked to the platform, profits have increased steadily, which has supported double-digit annual dividend growth.
The stock currently supports a dividend yield of 2.9%, but is down around 35% since the beginning of the year. As such, I reckon this could be an excellent opportunity to snap up the cheap dividend stock.
Another Buffett-style opportunity could be Tate & Lyle. This international ingredients business has a strong reputation in the food sector. It’s been serving clients for decades, which gives it a robust competitive advantage over newer peers. The company is also a dividend champion. It currently supports a dividend yield of 4.5%.
Meanwhile, the stock is down around 20% year-to-date, which suggests it may offer a margin of safety at current levels. Considering its global reputation, economies of scale and dividend history, I think Warren Buffett would undoubtedly be interested in buying this cheap dividend share.
Finally, I think it could be worth taking a look at BT. Warren Buffett likes to buy companies that dominate industries, and BT dominates the UK telecommunications landscape. Unfortunately, the organisation recently cut its dividend to investors.
However, considering the group’s robust cash flows, I think it could only be a matter of time before management reinstates the payout.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.