It’s no secret that Warren Buffett loves dividend stocks. Are Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) portfolio is packed with stocks with a long history of paying attractive dividends. All twelve of Berkshire’s largest holdings pay dividends.
However, Buffett is not known for investing in stocks with exceptionally high dividend yields. However, the Oracle of Omaha owns two ultra-high yield dividend stocks that are good picks for income investors right now.
Buffett’s “secret” ultra-high yield dividend stocks
Which dividend yield qualifies as ultra-high? The definition I use is four times the revenue of the SPDR S&P 500 ETF Trust. Since the S&P 500 ETF’s yield is currently 1.34%, the threshold for ultra-high yield is 5.36%.
You won’t find ultra-high yield dividend stocks in Berkshire Hathaway’s latest 13F filing. But Berkshire owns several stocks with super-high yields in what you might call Buffett’s “secret” portfolio.
Berkshire acquired General Reinsurance in 1998. General Re had acquired New England Asset Management (NEAM) three years earlier. NEAM manages its own investment portfolio that is separate from Berkshire’s portfolio. However, because NEAM is a wholly owned subsidiary of Berkshire, Buffett and Berkshire also own all the shares it owns.
NEAM’s portfolio includes several ultra-high yield dividend stocks. I think two especially stand out: Ares Capital (NASDAQ: ARCC) And Verizon Communications (NYSE: VZ). Ares Capital is the largest publicly traded business development company (BDC). Most investors are probably familiar with Verizon, which provides telecommunications services around the world.
Great choices for income investors
Why Ares Capital and Verizon Great Choices for Income Investors? Let’s start with their juicy dividends. Ares Capital’s forward dividend yield is over 8.9%, while Verizon’s forward dividend yield is over 6.4%.
Both companies’ dividend programs also have solid track records. Ares has had stable to growing dividends for fifteen years, with the highest regular dividend per share growth in the past decade among the major BDCs. Verizon has increased its dividend payout for 17 years in a row, the longest streak in the US telecommunications sector.
Ares and Verizon have been able to reward shareholders so consistently because they both have strong underlying businesses. Ares is the largest player in the growing US direct lending market. The company is very selective in the deals it makes, with a closing price of around 5%. Verizon is a leader in providing wireless and broadband services for businesses and consumers.
While many stocks are perfectly priced as the bull market maintains its momentum, Ares Capital and Verizon have attractive valuations. Ares’ forward price-to-earnings ratio is below 9.2, compared to a multiple of 15.5 for the S&P500 financial sector. Verizon stock trades at just over nine times forward earnings. By comparison, the expected earnings multiple for the communications services sector in the S&P 500 is over 19.2.
A few risks
No inventory is perfect. Ares Capital and Verizon are no exceptions. Both stocks have some risks.
As a lender, Ares faces the possibility that its borrowers may default on their loans. This risk could increase if the U.S. economy experiences a major downturn. Capital markets can be very volatile at times, even when the economy is not faltering.
Verizon has stiff competition in the telecom market. The company must invest heavily to deploy new technology such as 5G networks. Growth could be derailed by an economic downturn.
However, both Ares and Verizon appear to be in a great position to continue paying and growing their dividends. There’s probably nothing more important to income investors.
Should You Invest $1,000 in Ares Capital Now?
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Keith Speights holds positions at Ares Capital, Berkshire Hathaway and Verizon Communications. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Warren Buffett owns these two ultra-high yield dividend stocks. This is why they are a great choice for income investors right now. was originally published by The Motley Fool
