Billionaire Warren Buffett has always had a thing for companies that return capital to their shareholders. Passive income can compound into vast sums of wealth and make money productive as investors wait for a stock to appreciate.
Buffett's company Berkshire Hathaway owns several high-yielding stocks in its portfolio. However, of the 45 stocks and exchange-traded funds exchange-traded funds (ETFs) Berkshire owns, only one has a dividend yield above 5% -- and it's a stock Buffett has owned for over a decade.
One of Buffett's biggest mistakes, or best dividend stocks?
Buffett and Berkshire first got involved with Kraft Heinz (KHC 0.43%) in 2013, when Kraft Foods and Heinz were separate entities. Berkshire and a private equity company called 3G Capital bought Heinz. The two worked together two years later to merge Kraft and Heinz into the company it is today. The investment has not exactly panned out, with Kraft Heinz's stock flat over the last five years and down about 33% overall.
In 2019, Buffett told CNBC that he had made a mistake. "I was wrong in a couple of ways about Kraft Heinz," he said on Squawk Box. "We overpaid for Kraft."
Still, the Oracle of Omaha owns nearly 27% of the company today, and it makes up roughly 3.3% of Berkshire's massive $300 billion-plus equities portfolio. Kraft Heinz also pays a healthy 5.18% dividend yield.
KHC Dividend Yield data by YCharts.
The dividend payout ratio, which looks at dividends paid as a percentage of earnings, has reached close to 142%, meaning Kraft Heinz is paying more in dividends than it generates in earnings. That's not exactly something you want to see as an investor. However, the company took heavy impairment losses in its most recent quarter, which were much higher than normal, and these losses are not core to the business. Adjusted earnings, which strip out impairment losses, actually grew about 4% year over year.
Kraft Heinz had free cash flow of more than $2 billion through the first nine months of the year, which is up 10% year over year. The company pays about $450 million in dividends per quarter. Kraft Heinz has paid a dividend every year since 2012, although it did have to cut its dividend in 2019 and hasn't raised it since.
Is Buffett's dividend horse a buy?
Given the level of free cash flow, Kraft Heinz's dividend looks sustainable. Kraft Heinz hasn't increased the dividend in several years, and it does not appear to have much room to do so, although I'm sure income investors are content to collect 5% plus while the company continues to work on a turnaround.
Kraft Heinz has paid down a good deal of debt over the last five years, but it still has $19.4 billion in debt. Net sales have also been on the decline this year, but the company has a forward price-to-earnings ratio of around 10, which is quite reasonable in today's market.
Investors will likely have to remain patient for the company to execute a full turnaround. However, Buffett seems to have all the faith in the world, with Berkshire having never sold a share.
Kraft Heinz is best suited for income-seeking investors. The dividend will become more attractive as interest rates fall and investors can no longer collect 5% yields on Treasury bills and certificate of deposit (CD) accounts.
