Editor's note: A previous version of this article incorrectly stated that Berkshire bought Bank of America stock following the end of the second quarter.
Berkshire Hathaway's record-high cash stockpile might give some investors the wrong impression. Warren Buffett isn't completely avoiding buying stocks. Granted, he's being very selective -- but that's nothing new for the legendary investor.
Buffett recently bought seven stocks. And I think one of them is the best of the bunch for income investors.
All the stocks Buffett bought
Buffett initiated new positions in two stocks during Q2. He bought over 1 million shares of Heico. This marked the first time the aerospace and defense stock has been part of Berkshire's portfolio.
The second quarter also brought Buffett's first transaction involving Ulta Beauty. He bought over 690,000 shares of the cosmetics retailer worth around $266 million at the end of Q2.
Berkshire increased its stakes little in several existing holdings in Q2: Chubb Limited, Occidental Petroleum, Liberty Media Series A, and Liberty Media Series C. It also significantly boosted its position in audio entertainment company Sirius XM Holdings (SIRI).
A process of elimination
A simple process of elimination to rule out several of Buffett's recent buys for income investors. The two Liberty Media stocks don't pay dividends. Neither does Ulta Beauty.
Heico pays a dividend, but I doubt income investors would even give it a moment's thought. Its forward dividend yield is a puny 0.089%.
Chubb presents a somewhat tougher decision. Its forward dividend yield of 1.27% is low. On the other hand, the property and casualty insurer has increased its dividend payout for 31 consecutive years. My view, though, is that Chubb's yield isn't enough to be attractive to most income investors.
Occidental Petroleum pays a dividend yield of 1.59%. That's getting closer to a level that might entice some income investors. However, Oxy's dividend track record isn't that great. The company has increased its dividend for only three consecutive years. It slashed the dividend in 2020 because of the impact of the COVID-19 pandemic.
The best of the bunch for income investors
That leaves SiriusXM. It offers a high forward dividend yield of 3.41%. The company has also increased its dividend for seven consecutive years.
Granted, there are some issues with SiriusXM. Its declining free cash flow in recent years is concerning. That's not a trend income investors like to see. The company's revenue declined 3% year over year in the second quarter of 2024. Its satellite radio segment's self-pay subscribers also fell by around 100,000 year over year in Q2.
Perhaps the biggest challenge for SiriusXM is the huge increase in competition from digital content providers. Satellite radio is still appealing to many people, but the wide range of free podcast offerings can present an alluring alternative.
However, Buffett is buying SiriusXM hand over fist, so he obviously thinks positively about the stock. Income investors shouldn't have anything to worry about with the safety of the company's dividend. Despite a trend of lower free cash flow, SiriusXM can still easily afford to fund its dividend. Its dividend payout ratio is only 31.5%, indicating plenty of financial flexibility to keep the dividends flowing.
While Buffett doesn't care about what Wall Street thinks, several analysts expect SiriusXM stock to rise over the next 12 months. The average price target for the stock among the 11 analysts surveyed by LSEG) reflects an upside potential of 26%. The most upbeat analyst thinks SiriusXM can skyrocket by 123%. I suspect that's way too optimistic, though.
I don't think SiriusXM is the best dividend stock in Berkshire Hathaway's portfolio. Several others are better picks, in my view. However, if we only look at Buffett's recent purchases, it's arguably the best option for income investors.
