3 top Warren Buffett dividend stocks for the second half of 2022

After a few years of underperformance S&P500CEO Warren Buffett and Berkshire Hathaway began to crush the market again in 2022. The investment conglomerate’s value-focused approach to portfolio composition and its penchant for identifying strong companies have helped its stocks significantly outperform the broader market. .

With the market outlook still looking turbulent, Berkshire’s portfolio may be a good place to look to for stock-picking inspiration, and dividend-paying cohort companies could be particularly well-suited to generate returns in the current climate. Read on to see why a panel of Motley Fool contributors identified western oil (OXY 2.59%), Kraft-Heinz (KHC -1.93%)and resume (HPQ 1.54%) as income-generating stocks backed by Buffett to buy this summer.

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From a sideshow to a central position in Berkshire’s portfolio

Daniel Foelber (Western Petroleum): Occidental Petroleum’s (Oxy) roller coaster ride from over $80 per share to under $10 per share, at its current price of around $58 in about four years has been filled with drama. In the years leading up to the pandemic, Oxy was known as one of the riskiest exploration and production companies that did not hesitate to pay a premium price for acreage onshore. Its goal was to become the dominant producer in the Permian Basin through scale. Oxy achieved this goal by buying Anadarko Petroleum at a higher price, which gave Oxy an elite Permian portfolio in terms of acreage, but also let it spread thin due to a high-impact balance sheet. of leverage. This aggressive strategy backfired in 2020 and left Oxy far more vulnerable to market downturns than integrated majors or even E&P peers like Conoco Phillips Where EOG Resourceswhich can break even at a lower oil price than Oxy.

However, Berkshire Hathaway, led by Warren Buffett, saw Oxy’s depressed share price value and began gobbling up stocks on the assumption that Oxy would pose as a bandit if oil and gas prices were increasing. They did it. And today, Oxy is raking in free cash flow. Despite having increased more than fivefold in about two years, Oxy stock still has a price-earnings ratio of 8.7, which shows how well its high-risk strategy can pay off. Oxy used its outsized profits to buy back shares and pay down debt, improving the health of its balance sheet and better positioning it for the next market downturn.

In February, Oxy’s board approved a quarterly dividend of $0.13 per share, giving the stock a forward dividend yield of approximately 0.9%. That might not seem like a lot, but it wouldn’t be surprising if Oxy continued to increase its dividend in the coming years once it felt like it had paid off enough of its debt.

Today, Oxy is now the seventh largest public equity portfolio in Berkshire’s portfolio. Oxy is not a very safe oil and gas stock. But for investors who think oil and gas prices could remain high for years due to a limited supply base and declining investment in the industry, Oxy stands out as a long-term winner. .

Not the victim of inflation, many expected

James Brumley (Kraft Heinz): Although almost everyone understands that inflation has a negative impact on all businesses, there seems to be this general idea that it is the hardest part for food companies. Not only are these outfits (usually) low-margin operations anyway, but some of their biggest costs — freight and food ingredients — are seeing some of the biggest price hikes.

However, the ease with which most of these companies can pass these costs on to consumers, who need to eat, is largely lost in the mix. Take Kraft Heinz for example, my favorite dividend pick. Its organic sales in the first quarter were up 6% year over year, while its prices charged to retailers were up 9%. And most of the gap between these two increases is actually attributable to supply chain constraints rather than consumers balking at higher grocery prices.

This dynamic of course means that Kraft Heinz’s dividend payments are better protected than the market might have assumed a year ago when inflation started to soar. Again, there was plenty of cushion anyway. Its first-quarter earnings of $0.60 per share still easily covered the $0.40 dividend payment.

I don’t foresee any huge growth in the company’s top line and bottom line at any time in the future; it’s just not that kind of choice. With the dividend yield at a healthy 4.1%, however, I still consider it one of Buffett’s top dividend picks for newcomers.

This stock has a cheap valuation and a solid yield

Keith Noonan (HP): Computer hardware and printer maker HP saw a sharp valuation rise in April after news that Berkshire had bought a roughly 11% stake in the company, but it has since lost ground in the face of pressures affecting the whole market. The stock is now trading down about 16% year-to-date, and investors have the opportunity to buy the stock at significantly cheaper levels than Buffett got it.

Admittedly, growth prospects for the printer segment are not encouraging, but the company appears attractively valued and its hardware segment is going through a transition that should better position it for the long term. Where much of the business previously revolved around relatively inexpensive midrange hardware, HP is now focusing on high-performance PCs and laptops. He sees strong demand from consumers and businesses in the high-end category, and the transition could significantly improve the company’s overall margins.

The dividend profile here also looks pretty good. Recent sales have also pushed the hardware company’s dividend yield to around 3.2%, and the company has also increased its payout at an impressive pace.

HPQ Dividend Table

HPQ dividend given by Y-Charts

HP has posted consistent profits and its free cash flow has improved, so it looks well positioned to continue generating payments growth. While the company will likely face pressure if economic conditions continue to deteriorate, its stock currently trades at around seven times this year’s expected earnings, and this conservative valuation could provide some protection against continued market volatility. .

Daniel Foelber has no position in the stocks mentioned. James Brumley has no position in the stocks mentioned. keith noonan has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares) and HP. The Motley Fool recommends Kraft Heinz and recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short put options in January 2023 on Berkshire Hathaway (B shares) and short calls of 265 $ in January 2023 on Berkshire Hathaway (B shares). ). The Motley Fool has a disclosure policy.

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