Warren Buffett’s 3 Dividend Growth Stocks to Buy Now and Hold Forever

Warren Buffett loves growth stocks with high dividends. These companies consistently grow their profits year after year and choose to return those higher profits to their shareholders.

Companies that can do this are likely to have many of the characteristics that Mr. Buffett looks for in companies. And when those shares trade at fair value, they can deliver extraordinary returns to shareholders.

According to Hartford Funds research, dividend producers and dividend initiators returned an average of 10.24% over the 50-year period from 1973 to 2022. In contrast, the growth in non-payers was only 3.95%. That may help explain Buffett’s incredible performance as CEO. berkshire hathaway (BRK.A -0.44%) (BRK.B -0.25%)significantly exceeds. S&P500 Index for the same period.

The great news is that you can copy Buffett’s strategy. Berkshire Hathaway’s stock portfolio is publicly available thanks to required disclosures by the Securities and Exchange Commission. Here are three dividend growth stocks for your portfolio that you can buy now and hold forever.

Image source: Motley Fool.

1. Apple

Buffett’s first stock purchase was apple (AAPL -0.54%) In 2016, it became Berkshire Hathaway’s largest holding to date.

It’s easy to see why Buffett is a fan of Apple and its dividend. The iPhone is a cash-generating machine. Apple’s dominance in the premium smartphone space is unlikely to change anytime soon, and the company’s ability to generate more and more revenue from each user over time through its growing services business is driving revenue growth. .

Apple has a generous capital return program. The company suspended its dividend in the mid-1990s, but reinstated it in 2012. Since then, the dividend has continued to increase every year.

But more impressive is its stock buyback program. The company has bought back more than $600 billion of its own stock over the past decade. This supports solid earnings per share growth and gives investors confidence in the stock price.

Over the long term, management intends to achieve a net cash neutrality condition in which cash on the balance sheet equals the amount of debt held. It currently holds approximately $45 billion in net cash. On top of that, it now generates about $100 billion in free cash flow annually. Therefore, more dividend increases are likely in the future as Apple aims to return most of its cash to shareholders.

The company’s stock currently trades at a premium of approximately 32 times estimated earnings. But given its large share buyback plan and large net cash position, it deserves to trade at a premium. Despite the high price, dividend growth investors should consider Apple stock for their portfolios.

2. Visa

Mr. Buffett owns the stock. visa (V -0.02%) It has been part of Berkshire’s portfolio for more than a decade. Not only did the stock outperform the market at the time, but Visa has raised its dividend every year since.

Visa benefits from a classic competitive advantage. This is a major focus of Buffett’s analysis of businesses. The payment network is the largest in the world and is the first choice for banks looking to issue new credit cards, especially internationally accepted credit cards.

The only other network that comes close to this is master Card, another Berkshire holding. If a company tries to build a payments network from scratch, it will take years, even decades, to get anything close to Visa or Mastercard.

The continued shift from cash to digital payments has been a huge boon for Visa. The hard work of building out the payments network has already been done, so every extra penny Visa earns from transactions on rails essentially goes straight to its bottom line.

Management returns nearly all of its incremental free cash flow to investors through dividends and a stock repurchase program. And its capital return program remains heavily tilted towards share buybacks. The company’s board recently approved a multi-year, $25 billion share repurchase. By comparison, last year’s dividend was just $3.75 billion.

But with nearly $20 billion in annual free cash flow, there’s plenty of room to increase the dividend, as it has every year since going public in 2008. The company’s stock currently trades at a discounted forward P/E ratio of just 26 times. This is above the historical valuation of smaller rival Mastercard, which trades at about 30 times expected earnings.

3.T-Mobile

T-Mobile US (TMUS 0.87%) is a relatively recent addition to Berkshire Hathaway’s portfolio. Buffett first bought the stock in 2020 after the company merged with Sprint.

The merger gave T-Mobile critical spectrum assets to help build out its 5G network, helping the company become a leading wireless network operator. This has led to a sustained increase in market share, an increase in average revenue per account, and rapid growth in the home Internet business.

But the real story for T-Mobile is its free cash flow (FCF) growth. The company generated adjusted FCF of more than $4 billion last quarter and expects to generate FCF of $13.4 billion to $13.6 billion for the full year. Management is eyeing $18 billion in FCF next year. This puts it on par with older competitors in the space, which are working to catch up to T-Mobile’s network while paying down debt.

T-Mobile’s strong FCF growth has allowed it to repurchase its stock at a significant pace. The company announced a $14 billion share repurchase program in late 2022 and added an additional $19 billion in total shareholder returns in September 2023.

The latter authorization includes a new dividend that management plans to grow at 10% per year for the foreseeable future. And with a strong FCF outlook and a major share buyback underway, there’s no reason to doubt its ability to keep that promise.

Despite a strong earnings growth outlook, T-Mobile stock looks like a great opportunity for investors, with the stock trading at less than 16 times analysts’ 2024 earnings estimates.