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Summary

  • All of Warren Buffett's Top 7 holdings are dividend growth stocks.
  • Several of these businesses have P/E ratios under 15.
  • Warren Buffett combines growth, value, and dividend investing.
  • Find out the 2 reasons to sell a high quality dividend growth stock.
  • Warren Buffett has held American Express for 50 years.

Warren Buffett's strategy has evolved over the years. The Oracle of Omaha looks for high quality businesses trading at fair or better prices. When asked about his style, Warren Buffett says he is:

85 percent Benjamin Graham and 15 percent Philip Fisher
- Warren Buffett

Philip Fisher popularized growth investing and investing large percentages of your portfolio into a few businesses that have favorable long-term outlooks. The 85 percent Graham portion is value investing; paying less for a stock than its intrinsic value. Warren Buffett looks for solid growth businesses that are trading at fair or better prices, not cheap businesses that have adequate growth.

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price
- Warren Buffett

Warren Buffett's Top 7 Picks

That is how Warren Buffett says he invests. When you examine his portfolio, it is consistent with his advice. Warren Buffett's Top 7 positions are listed below:

  • Wells Fargo (NYSE:WFC), 20% of portfolio
  • Coca-Cola (NYSE:KO), 16% of portfolio
  • American Express (NYSE:AXP), 13% of portfolio
  • International Business Machines (NYSE:IBM), 12% of portfolio
  • Procter & Gamble (NYSE:PG), 4% of portfolio
  • Exxon (NYSE:XOM), 4% of portfolio
  • Wal-Mart (NYSE:WMT), 4% of portfolio

Over the last 5 years, every single one of Warren Buffett's Top 5 holdings has paid increasing dividends.

(click to enlarge)
Source: Ycharts

Dividend Aristocrats and Warren Buffett

Of the Top 7 businesses in Warren Buffett's portfolio, 4 are Dividend Aristocrats: KO, PG, XOM, & WMT. It is not a coincidence that each of the Top 7 businesses in Warren Buffett's portfolio pay increasing dividends, and 4 are Dividend Aristocrats. Warren Buffett looks for businesses with the ability to grow profitably year after year on a consistent basis. He also looks for businesses that return profits to shareholders in the form of dividends.

What About WFC, AXP, & IBM?

Wells Fargo had a long history of consecutive dividend increases before the financial crisis. The company reduced its dividend from $0.34 to $0.05 at the bottom of the market in early 2009. Wells Fargo has since recovered, and now pays a dividend of $0.35 per share.

Source: Wells Fargo Dividend History

American Express paid a small $0.18 per share dividend each quarter from 2008 through 2011. In 2012, the company increased its quarterly dividend to $0.20 per share, and then to $0.23 in 2013, and finally $0.26 per quarter in 2014. The company now increases its dividend payments each year, and is very likely to continue to do so.

Source: American Express Dividend Information

IBM has been regularly increasing its dividend payments since 1999. The company now has a 15 year history of dividend increases. IBM is likely to continue increasing its dividend year after year in a similar fashion as Warren Buffett's other top holdings.

Source: IBM Investor Relations

Buy Low, Sell Never

Our Favorite Holding Period is Forever
- Warren Buffett

Warren Buffett has held many of the businesses on this list over very long time frames. He has held American Express since 1964, Coca-Cola since 1988, and Wells Fargo since 1989. Warren Buffett has had ample opportunities to sell these businesses over the last several decades. According to the biography Snowball, Warren Buffett wanted to sell Coca-Cola in the late 1990's when the company had a P/E ratio in the 50's, but didn't as he was on the company's board.

His yearning to sell Coca-Cola in the late 1990's shows that there is a time to sell successful businesses; when valuation multiples become absurd. The only other time to sell a business is when its competitive advantage is deteriorating. The 2 Sell Rules from the 8 Rules of Dividend Investing reflect the only two reasons to sell a high quality business. The 2 Sell Rules are:

Sell Rule # 1 - The Overpriced Rule

Common Sense Idea: If you are offered $500,000 for a $250,000 house, you take the money. It is the same with a stock. If you can sell a stock for much more than it is worth , you should. Take the money and reinvestit into businesses that pay higher dividends.

Financial Rule: Sell when the normalized P/E ratio is over 40.

Evidence: The lowest decile of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to 2010.

Source: The Case for Value by Brandes Investment Partners, Page 2

Sell Rule # 2 - The Survival of the Fittest Rule

Common Sense Idea: If a stock you own reduces its dividend, it is paying you less over time instead of more. This is the opposite of what should happen. You must admit the business has lost its safety and reinvest the proceeds of the sale into a more stable business.

Financial Rule: Sell when the dividend payment is reduced or eliminated.

Evidence: Stocks that reduced or eliminated their dividends had a 0% return from 1972 through 2013.

Source: Rising Dividends Fund, Oppenheimer, page 4

Investing Like Warren Buffett

Warren Buffett invests heavily in dividend growth stocks, and holds them for the long run. Mocking his investment style is fairly simple, but requires patience and discipline. Warren Buffett tends to purchase high quality dividend growth stocks when they trade at fair or better prices. The market is currently overvalued due to artificially low interest rates from the federal reserve to bolster the economy.

P/E Ratio of Warren Buffett's Top 7 Stocks

  • Wells Fargo , P/E of 12.81
  • Coca-Cola , P/E of 22.32
  • American Express , P/E of 18.74
  • International Business Machines , P/E of 12.82
  • Procter & Gamble , P/E of 21.88
  • Exxon , P/E of 13.77
  • Wal-Mart , P/E of 15.94

Source: Finviz

Of Warren Buffett's Top 7 picks, Wells Fargo, IBM, and Exxon appear cheap based on the P/E ratio. Walmart appears fairly valued. American Express, Procter & Gamble, and Coca-Cola appear to be somewhat overvalued.

Of the stocks in Warren Buffett's portfolio, both Exxon and Wal-Mart are Top 10 stocks based on the 8 Rules of Dividend Investing. IBM, American Express, and Wells Fargo are not included in the Sure Dividend system because they do not have 25+ years of dividend payments without a reduction.

Final Thoughts

Investing in high quality businesses that reward shareholders through profitable growth and increasing dividends generates wealth over time. Warren Buffett has utilized this approach to compound his wealth over the last several decades. The key to the strategy is identifying businesses with a strong competitive advantage, discipline, and patience.

Disclosure: The author is long WMT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: Warren Buffett's Dividend Growth Portfolio