Under the leadership of CEO Warren Buffett, Berkshire Hathaway has become one of history's most successful businesses. The investment conglomerate has a market capitalization of more than $1 trillion, and it currently ranks as the world's 10th most valuable company.
In addition to its collection of partly and fully owned private subsidiaries, Buffett's company owns a portfolio of publicly traded stocks that's currently worth $300.5 billion. Investors who dive into the breakdown of Berkshire's portfolio may notice that the portfolio is actually heavily concentrated around a relatively small number of holdings. Those who dig a bit deeper might also notice that each of Berkshire's 10 largest stock holdings pays a dividend.
So while Berkshire itself doesn't pay a dividend, it's clear that Buffett's company prefers high-quality businesses that can reliably return cash to shareholders through direct payments. Read on for a look at two S&P 500 stocks that account for 39.5% of the investment conglomerate's stock portfolio.
The dividend is small, but this stock is still Buffett's biggest bet
Keith Noonan: With a market cap of roughly $3.67 trillion, Apple (AAPL -1.05%) stands as the world's most valuable company. It didn't reach that position by accident. The tech giant has frequently ranked as the world's most profitable business over the last decade, and impressive earnings growth has translated to stellar performance for the company and its stock.
The company's iPhone line is at the center of Apple's profit-generating machine, and its hardware typically accounts for the majority of overall global smartphone sales revenue, despite many other players operating in the space. The iPhone's stellar brand strength and loyal user base allow Apple to command average selling prices that far surpass the competition, and the company captures the large majority of global smartphone operating profits. In addition to dominating the mobile space, Apple sees strong performance from software and services, wearables, and other categories.
Berkshire Hathaway first invested in Apple stock in the first quarter of 2016. The Oracle of Omaha's company dramatically increased its investments in the tech leader as profits continued to soar. Despite it sporting a relatively small dividend yield, Berkshire's heavy investment in the stock meant that Apple has been one of its biggest generators of dividend income over the last decade.
Even as Berkshire has made some significant shifts in its portfolio composition, Apple continues to account for 24.2% of the investment conglomerate's total stock holdings. While the stock pays an annual dividend of $1 per share and only yields roughly 0.4% at today's prices, Berkshire's holdings of 300 million shares mean that it would be on track to generate $300 million in dividend income over the next year if it maintained its Apple position at current levels. But recent moves from Buffett's company suggest that its dividend proceeds on the stock could wind up being lower.
Berkshire has actually sold 605 million shares of Apple stock since last year's fourth quarter, reducing its holdings by nearly 70%. The Oracle of Omaha's company has become more cautious about the stock market amid the S&P 500's roughly 33% rally over the last year. With the company being a net seller of stocks, Berkshire's cash-and-short-term-bond pile now sits at more than $325 billion -- a record level.
A reinvented financial powerhouse
Jennifer Saibil: Warren Buffett has owned American Express (AXP -0.81%) stock since 1995, making it his second-longest holding, right behind Coca-Cola (KO -0.66%). He has said that he would never sell it, and he's yet to sell a single share. American Express has always represented a large portion of the Berkshire Hathaway portfolio, but it moved into second place only recently since Buffett sold some Apple and Bank of America (BAC -0.69%) stock.
Berkshire Hathaway owns 21.5% of American Express stock, which expresses its enthusiasm for the company. AmEx also accounts for 15.3% of Berkshire's total stock holdings.
American Express is the classic Buffett stock, and it's no wonder why he loves it and has held on to it for so long. It's differentiated from other financial stocks and even other credit card networks in a number of ways that give it an enduring moat. It targets an affluent clientele that's resilient under pressure and spends more than average in any given timeframe. Consider that even though it only has 150 million paying card members, versus Visa's (V -0.70%) 4.5 billion cards, it has close to double Visa's revenue.
It charges annual fees for most of its products that continue to increase and that account for a hefty portion of revenue, yet it has high retention rates. That funds the incredible rewards program it offers to fee-paying customers. It also boosts the bottom line.
AmEx acts as its own bank, unlike the other major credit card networks, which partner with banks to provide the credit for shoppers to make purchases. This closed-loop model gives the company more control over the business and creates the brand identity American Express has cultivated. As a bank, it also has lots of cash to fund many different ventures, and it makes money on the cash it keeps from deposits with net interest income. The flip side of that is that it has more exposure to changes in interest rates. However, it has excellent risk-management systems, and has reported increasing profits even though it's had to build up its provisions for losses.
American Express has paid a dividend for 25 years,and it yields 0.9% at the current price. Buffett doesn't seem to go for the highest-yielding dividends, but most of his dividend stocks have consistency and long track records. American Express is an excellent choice for value, security, and a growing dividend.
