5 Dividend Stocks Approved By Warren Buffett

With the Federal Reserve pushing interest rates to historic lows, money has been forced into different asset classes in the great hunt for yield. Dividend-paying stocks can provide a stable source of cash flow that exceeds the rate on bonds or savings accounts, but investors may want to consider some timeless advice from the Oracle of Omaha before pulling the trigger.

Warren Buffett, one of the wealthiest men in the world, does not pay shareholders of Berkshire Hathaway (NYSE:BRKA) a dividend. However, he has provided insightful views on the subject over the years. Buffett believes management should think long and hard about when to retain earnings and when to distribute them to shareholders. As he explains in a past shareholder letter, “Allocation of capital is crucial to business and investment management.”

If earnings that are needed to run the business are paid out in dividends, the company could suffer from declining sales, lose its competitive advantage, and damage its financial strength. In fact, Buffett notes, “No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused.”

At this point in time, Buffett believes Berkshire Hathaway should retain its earnings in favor of paying out a dividend. The company is able to put those earnings to better use and shareholders even receive benefits from Berkshire Hathaway investing in large stable companies that more often than not pay attractive dividends.

Here’s a look at five Buffett-approved dividend-paying stocks that do not appear to be destined for oblivion:

Walmart (NYSE:WMT):

The world’s largest retailer is also one of Berkshire Hathaway’s largest positions, with a value of nearly $4 billion at the end of the first quarter. Walmart pays a dividend of 2.5 percent, and shares have gained 9.7 percent year-to-date. The payout ratio, which is the percentage of earnings paid to shareholders in dividends, is 33 percent.

Coca-Cola (NYSE:KO):

The Georgia-based beverage company is easily one of Buffett’s favorite stocks. In a recent interview, he says, “We’ve never sold a share, and I wouldn’t think of selling a share.” Coca-Cola pays a dividend of 2.8 percent, and shares have gained 11.3 percent this year. The company’s payout ratio is 55 percent.

Wells Fargo (NYSE:WFC):

The bank was founded in 1852 and is Berkshire Hathaway’s largest equity position, with a value of about $18 billion at the end of the first quarter. Wells Fargo pays a dividend of 3.0 percent, and shares have surged more than 17 percent this year. The company’s payout ratio is 26 percent.

Procter & Gamble (NYSE:PG):

The consumer giant was founded in 1837 and pays an attractive dividend of 3.1 percent. Shares have jumped 15 percent year-to-date, and have a payout ratio of 50 percent. At the end of the first quarter, Berkshire Hathaway held a $4.26 billion position in Procter & Gamble.

ConocoPhillips (NYSE:COP):

The world’s largest independent exploration energy company pays a large dividend of 4.3 percent. However, shares have only gained 5.2 percent year-to-date. At the end of the first quarter, Berkshire Hathaway held a $1.51 billion position in the company. ConocoPhillips has a payout ratio of 43 percent.

Investors seeking to focus more on capital gains, may also want to consider Phillips 66 (NYSE:PSX), which was a spin-off venture from ConocoPhillips last year. Shares of Phillips 66 have surged more than 20 percent this year, and pay a dividend yield of 2.0 percent. Berkshire Hathaway also holds a $1.76 billion stake in Phillips 66, as of the end of the first quarter.

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