Investment celebrity Warren Buffett is known for his long-term approach to investing and focus on value stocks. His investment strategies have been proven successful, with countless investors following in his footsteps. However, Buffett’s road to becoming wealthy was not just the result of his investments appreciating massively over time. His investments also include safe dividend stocks that consistently generated millions quarter after quarter, which he ploughed back into his investments, thus generating even greater returns, and retaining a greater percentage ownership in the companies he invested.
During a bear market, it can be hard to find stocks that offer strong returns without too much risk. However, if the underlying business is sound, the company will continue paying out regular dividends — income that could be of critical importance in a recessionary or volatile economic environment.
Three stocks that the Berkshire Hathaway CEO has purchased during previous market declines could be suitable investments for those seeking both passive income as well as capital appreciation. That goes double for investors contemplating the probability that we could be headed into a recession, and therefore another bear market, in short order.
Each of these three companies are ones Buffett has recently added to this past quarter, and are among his top holdings to consider buying on dips.
Most investors who follow Warren Buffett know that he is among the most bullish big-time money managers when it comes to Apple (AAPL -0.55%).
The Oracle of Omaha first bought Apple’s stock in 2016, being influenced in his decision by his two deputies, Todd Combs and Ted Weschler. Over the years, Buffett has decried not buying more Apple on dips, providing many such reasons for doing so over the years.
Buffett’s view of Apple, as a premium provider of consumer goods to a very loyal clientele, has been on point. Apple’s closed-loop ecosystem and focus on quality has led the company to become the leading smartphone provider in the U.S. With over 50% market share in this incredibly powerful segment, Apple has become ubiquitous in most of its key markets. The company’s sheer cash flow growth over the years is a testament to the fundamental soundness (or quality) Buffett looks for in his core holdings.
With Apple now comprising approximately 39% of Berkshire Hathaway’s portfolio, Buffett is clearly in this position for the long haul. While Buffett has trimmed his Apple position from time to time, his purchases over the years have far outweighed his divestitures, providing Berkshire holders with significant exposure to this world-class gem.
Apple’s dividend yield of only 0.6% ($0.92 per share annually) is quite small, relative to the other names on this list. However, this is also a stock that’s exploded in value since Buffett started buying in 2016, meaning his realized yield is much higher compared to his base cost than an investor putting fresh capital to work. Indeed, while Apple has raised its dividend distribution over the years, it hasn’t quite kept up with its stock price appreciation over time. But for those looking for a mix of passive income and growth, this remains a top pick to consider, in my books.
Warren Buffett’s current investment in Louisiana-Pacific (LPX -2.27%) is valued at $339 million. While that would be a whopping investment for most, this position only constitutes roughly 0.1% of Buffett’s overall equity portfolio, its 38th biggest holding.
Notably, this rather small position for Buffett still amounts to an ownership stake of roughly 7.3% in Louisiana-Pacific, based on its price at the time of acquisition. This purchase is unique, in that Buffett appears to be taking a stake in another economically sensitive company at a time when most investors are looking to play defense. This provider of building materials such as engineered wood products, siding, and other construction-related items utilized in commercial and residential projects, has somewhat stagnated over the past year, following a post-pandemic boom.
What does Buffett know that we don’t? I guess we’ll find out. Many know that Buffett is a perma-bull when it comes to the economic outlook for America. This bet, while small in the grand scheme of Berkshire’s overall portfolio, appears to reaffirm this view. If homebuilding activity picks up (whether due to a drop in interest rates, or the need to fulfill surging demand from Millennial home buyers), Buffett could be due for a big win.
Louisiana-Pacific has been moving toward a more comprehensive business strategy, increasing its involvement in the repair and renovation market and creating value-enhancing products. Buffett’s previous investments in mobile home producers and other companies in this sector suggest he believes the future may be bright for this company.
In the last quarter, Louisiana-Pacific increased its quarterly distribution by more than 9% to $0.24 per share, bringing the stock’s overall dividend yield to 1.7%. For those bullish on the company’s business model looking forward, this is a company that could be poised for continued dividend growth over time, making Louisiana-Pacific an intriguing passive income stock from this perspective right now.
Another relatively recent investment made by Berkshire is Paramount Global (PARA -0.15%), a leading global media and entertainment giant. For Buffett, this pick appears to be a way to play declining interest in conventional media names, at a time when streaming and innovation is looking to disrupt this overall sector. Over the past year alone, Paramount has lost roughly 30% of its value, and much more from its 2021 peak.
Paramount does have its own streaming network, Paramount Plus. Accordingly, this isn’t a company that’s completely falling behind its peers in monetizing its offerings in different ways. The company’s impressive release of Top Gun: Maverick last year certainly provided investors with the idea that perhaps the franchises this outfit owns aren’t completely washed up. (This movie was the highest-grossing film at the domestic box office last year, and quite good, if I don’t say so myself.)
Paramount’s performance at the box office was notable, putting forward 10 films, six of which debuted at the No. 1 spot, with the company earning more than $2 billion in ticket sales. Top Gun: Maverick brought in the lion’s share of that take, with $1.5 billion in ticket sales, but it proves what solid media franchises may be worth as stand-alone businesses.
The question many investors have with Paramount is how its streaming platform will perform moving forward. Paramount Plus does hold a considerable library of content, including more than 30,000 television episodes from CBS, BET, Nickelodeon, MTV, Comedy Channel, and Paramount Pictures. Its film library is also impressive, leading to many investors attempting to value this business on the basis of its content alone.
It appears Buffett is making the bet that Paramount’s streaming platform, along with its library of content (which may be undervalued relative to its peers) could propel this dividend-producing stock higher over time. Such a view would lead one to believe that the company’s dividend outlook could be more rosy than what the market is pricing in, making this a unique value, income, and growth bet for the medium- to longer-term.
While Paramount appears to be among the more difficult companies to assess due to its uncertain outlook, this is a company that’s profitable, trading at around 21 times earnings, and pays a dividend yield of 4.4%. That’s the kind of business Buffett clearly likes, and is reason enough for many investors to at least consider this often-overlooked company.
Investing like Buffett for passive income can provide excellent total returns
Buffett is known for his well-timed and prescient stock purchases over the decades. Indeed, these three companies are about as diverse as one could choose. However, they’re all stocks Buffett has recently added to, suggesting there’s something to be investigated with each.
While Apple is one of my holdings, I would need to dig deeper into Louisiana-Pacific and Paramount. And with the Buffett stamp of approval, these are two stocks I’m now watching closely. I think it’s prudent for other investors to do the same.
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