Summary
- Buffett loves these five dividend blue chips, and three are worth buying today.
- Three things explain Buffett's legendary investing success, and two of those are things that regular investors can and should strive to emulate.
- Buffett's fortune is built on wonderful companies at fair to attractively valued held for the long term.
- Today, these five dividend blue chips represent 76% of Berkshire's $300 billion portfolio. They are Buffett's five favorite companies.
- Four of these companies are expected to deliver low- to mid-double digit long-term returns, and three of them are potentially reasonable to strong buys today.
For 56 years, he's delivered 20% annual returns, turning $1 into $27,153.
For Buffett himself, it's generatedmore than $120 billion in wealth.
A study by AQR looked at the main sources for Buffett's incredible returns and concluded that three things explain almost all of them.
- Buying high-quality, mostly dividend paying blue chips at reasonable to attractive valuations
- Owning for the long term
- 60% effective leverage via insurance company float
Two of these strategies are ones that regular investors can replicate, so I thought it might be useful to look at Buffett's favorite dividend blue chips as a source of investing ideas.
These aren't just companies that Berkshire (BRK.A) (BRK.B) owns in its portfolio. They represent 76% of his company's $300 billion portfolio.
In other words, these are dividend blue chips that Buffett well and truly loves. Otherwise, he wouldn't own such concentrated positions.
So let's take a brief look at the reasons Buffett loves these five dividend blue chips, why you should as well, and which four are potentially worth buying today.
Apple (AAPL): The Ultimate Luxury Tech Stock
- Percentage of Berkshire's Portfolio: 38.9%
- Average cost basis: $37.21 = 294% gain (not including dividends)
- DK quality rating: 92% medium risk 13/13 Ultra SWAN (sleep-well-at-night)
- Fair value:$158.84
- Current price:$146.71
- Historical discount: 8%
- DK rating: potential good buy
- Yield: 0.6%
- Long-term growth consensus: 10.4%
- Long-term total return potential: 11.0%
(Source: FAST Graphs, FactSet)
Bank of America (BAC): A Classic Turnaround Success Story
- Percentage of Berkshire's Portfolio: 11.2%
- Average cost basis: $25.52 = 34% gain (not including dividends)
- DK quality rating: 84% very low risk 11/13 SWAN (sleep-well-at-night)
- Fair value:$45.85
- Current price:$34.21
- Historical discount: 25%
- DK rating: potential strong buy
- Yield: 2.6%
- Long-term growth consensus: 9.3%
- Long-term total return potential: 11.9%
Chevron (CVX): The Highest Quality Major Oil Giant
- Percentage of Berkshire's Portfolio: 9.8%
- Average cost basis: $126.32 = 29% gain (not counting dividends)
- DK quality rating: 91% medium risk 12/13 Super SWAN (sleep well at night)
- Fair value:$160.73
- Current price:$162.41
- Historical discount: -1%
- DK rating: hold (though really at fair value)
- Yield: 3.7%
- Long-term growth consensus: 10.0%
- Long-term total return potential: 13.7%
(Source: FAST Graphs, FactSet)
Coca-Cola (KO): The Quintessential Buffett "Wide Moat" Stock
- Percentage of Berkshire's Portfolio: 8.5%
- Average cost basis: $27.13 = 122% gain (not including dividends)
- DK quality rating: 98% low risk 13/13 Ultra SWAN (sleep-well-at-night) dividend king
- Fair value:$58.86
- Current price:$59.84
- Historical discount: -2%
- DK rating: hold (but essentially a wonderful company at a fair price"
- Yield: 3.1%
- Long-term growth consensus: 5.7%
- Long-term total return potential: 8.8%
American Express (AXP): The Rich Person's Credit Card Company
- Percentage of Berkshire's Portfolio: 7.5%
- Average cost basis: $39.31 = 336% gain (not including dividends)
- DK quality rating: 93% low risk 11/13 Super SWAN (sleep-well-at-night)
- Fair value:$174.81
- Current price:$174.25
- Historical discount: 0%
- DK rating: potentially reasonable buy
- Yield: 1.4%
- Long-term growth consensus: 11.5%
- Long-term total return potential: 12.9%
Bottom Line: Buffett Loves These 5 Dividend Blue Chips, And You Should Too
Let me be clear: I'm not calling the bottom in these five blue chips. I'm not a market timer, and neither is Buffett.
Even 13/13 Ultra SWAN quality does NOT mean "can't fall hard and fast in a bear market."
Fundamentals are all that determine safety and quality, and my recommendations.
- Over 30-plus years, 97% of stock returns are a function of pure fundamentals, not luck
- In the short term, luck is 25X as powerful as fundamentals
- In the long term, fundamentals are 33X as powerful as luck
While I can't predict the market in the short term, here's what I can tell you about AAPL, BAC, CVX, KO, and AXP.
All five of these companies have strong businesses, good brands, skilled and adaptable management, and solid balance sheets.
They are all world-beater companies, though none are particularly fast growing.
As you can see from the long-term consensus return potentials, Buffett isn't "swinging for the fences." He's striving for solid high single and low double-digit returns.
Given his 1.6X effective leverage, that's all he needs to deliver excellent returns for Berkshire investors.
Obviously, most of us don't own insurance companies and thus can't use negative cost leverage.
But Buffett's focus on quality and reasonable valuations is certainly something worth learning from an emulating.
Right now, AAPL, AXP, BAC, and CVX have very solid double-digit return potentials and they are what I would focus on if you're still building your nest egg.
- AXP, BAC, and AAPL are reasonably to attractively valued double-digit return potential Buffett blue-chips
- My top three recommendations among his favorite companies
KO is a defensive name that BRK has owned since the 1980s and is a slightly overvalued choice for a dividend king that is a quintessential "Wide moat" Buffett dividend king.
CVX and KO are technically 1% to 2% overvalued, but they effectively represent potential reasonable buys for long-term investors comfortable with their risk and total return profiles.
Following Buffett's lead isn't going to get you 20% returns. But it's a potentially solid source of ideas for building a diversified, prudently risk-managed portfolio to help you achieve your financial dreams.
