One aspect of Warren Buffett's stock plays that often gets overlooked is the vast pile of dividend payouts they produce. Not every stock in the celebrated investor's Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) pays a dividend, and some do so at rather low yields, but there are several with quite generous payouts.
With that in mind, let's break out the magnifying glass to inspect the dividends of the No. 1 and No. 2 top yielders -- Kraft Heinz (NASDAQ: KHC) and Chevron (NYSE: CVX), respectively.
1. Kraft Heinz
It's safe to say that "high-yield dividend" is not what leaps to mind when most investors think about the food industry. If comestibles businesses pay dividends at all, their yields are usually skimpy.
That sure isn't the case with Berkshire Hathaway equity portfolio yield champ Kraft Heinz. The company's $0.40-per-share quarterly disbursement currently pays out at an almost 5% clip.
But we need to be careful here. A high-yield dividend could mean a company is doing gangbusters business and harnessing a river of free cash flow to be generous to its shareholders. Conversely, it might indicate a stock's price has declined enough to boost an otherwise unremarkable payout into high-yield dividend territory.
Unfortunately, Kraft Heinz tilts more into the second category.
True, it has a brand portfolio stuffed with familiar names, such as Jell-O, Kool-Aid, and Oscar Mayer. But these products were hot in the distant past, when consumers weren't as worried about the apparently negative health effects of processed foods. These days, the trend favors fresh and healthy meals, snacks, and drinks, not packaged old standbys like hot dogs and flavored gelatin.
Kraft Heinz's financials reinforce the idea that this is a business of the past. Revenue hasn't risen to any meaningful degree since 2020, even though the company benefited somewhat from a nostalgic consumer move toward comfort foods during the COVID pandemic. On a brighter note, profitability has come up significantly of late. However, margins are still not high enough to make this operator a real standout.
Another positive development is that of free cash flow (FCF), since Kraft Heinz goods are well represented on grocery and convenience store shelves and the company moves a lot of product. For the full year 2023, that line item (which reflects cash flow after capital spending) for the company stood at nearly $3 billion, enough to cover the sub-$2 billion it paid out in dividends.
However, to my thinking at least, a sustainable high-yield dividend isn't attractive in and of itself. I like to see at least some potential for notable revenue and profitability improvement to help push up the share price. I'm not sensing much of that for Kraft Heinz and, judging by its withered share price over the years, neither are many investors. This stock isn't a buy for me.
2. Chevron
Chevron is a powerhouse company in an energy sector that's really hit its stride in the recent past. It is one of the top petroleum companies on the planet, and is busy reaping the benefits of the long-tail oil boom.
Investors expect energy extractors, refiners, and retailers to generously share their proceeds during the good times, and Chevron is obliging. That's why it's the Berkshire Hathaway equity portfolio runner-up yielder, with a payout that sits at about 4%.
Buffett and his team are clearly believers in Big Oil, as the Chevron holding is fifth in terms of total market value within the portfolio. Not far behind is No. 6, which happens to be fellow oil incumbent Occidental Petroleum.
Berkshire is being somewhat contrarian with these positions. After all, there's a global push for greener energy solutions, and consumers are clearly willing to spend money on environmentally friendly goods such as electric vehicles (EVs) and solar power.
Yet the petroleum industry is not only enduring but also continues to thrive. More products are made with petroleum than many realize -- it's not only about gasoline and other fuels. Meanwhile, a great many of the world's consumers are choosing to stick with classic petroleum-based solutions for a variety of reasons, such as habit, convenience, and ubiquity. Compare the density of gas stations in the U.S. with that of EV charging banks, for example.
Relatively lower oil prices dinged Chevron's first-quarter results this year, but the company is still very much in the black. It earned more than $5.5 billion on revenue of nearly $49 billion in its first quarter. A look into the crystal ball reveals future growth, with full-year 2024 revenue anticipated to be 7% higher than the 2023 figure, and per-share net income inching up by 3%.
It's also worth noting that through boom and bust cycles, Chevron's management has consistently raised the company's payout. With its latest dividend raise earlier this year, the company has now increased the distribution 37 years in a row. Particularly given its recent success, there's little reason to stop anytime soon, so investors can count on getting increasing cash payouts as the years go by. To me, then, Chevron feels like a solid investment.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Kraft Heinz and Occidental Petroleum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
