It's no secret that Warren Buffett likes dividend stocks. His Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) portfolio is chock-full of stocks with long histories of paying attractive dividends. All of Berkshire's top 12 holdings pay dividends.
However, Buffett hasn't been known for investing in stocks with exceptionally high dividend yields. The Oracle of Omaha, though, does own two ultra-high-yield dividend stocks that are great picks for income investors right now.
Buffett's "secret" ultra-high-yield dividend stocks
What dividend yield qualifies as ultra-high? The definition I use is four times the yield of the SPDR S&P 500 ETF Trust. Since the S&P 500 ETF's yield is currently 1.34%, the threshold for ultra-high yield is 5.36%.
You won't find any ultra-high-yield dividend stocks in Berkshire Hathaway's latest 13F filing. But Berkshire owns several stocks with super-high yields in what you might call Buffett's "secret" portfolio.
Berkshire acquired General Reinsurance in 1998. General Re had acquired New England Asset Management (NEAM) three years earlier. NEAM manages its own investment portfolio that's separate from Berkshire's portfolio. However, since NEAM is a wholly owned subsidiary of Berkshire, every stock it owns, Buffett and Berkshire also own.
NEAM's portfolio includes several ultra-high-yield dividend stocks. I think two of them especially stand out: Ares Capital(NASDAQ: ARCC) and Verizon Communications(NYSE: VZ). Ares Capital is the largest publicly traded business development company (BDC). Most investors are probably familiar with Verizon, which provides telecommunications services around the world.
Great picks for income investors
Why are Ares Capital and Verizon great picks for income investors? Let's start with their juicy dividends. Ares Capital's forward dividend yield tops 8.9%, while Verizon's forward dividend yield is over 6.4%.
Both companies' dividend programs also have solid track records. Ares has 15 years of steady-to-growing dividends, with the highest regular dividend per share growth over the last 10 years among large BDCs. Verizon has increased its dividend payout for 17 consecutive years, the longest streak in the U.S. telecommunications industry.
Ares and Verizon have been able to reward shareholders so consistently because they both have strong underlying businesses. Ares is the largest player in the growing U.S. direct lending market. The company is highly selective in the deals it makes, with a closing rate of around 5%. Verizon is a leader in providing wireless and broadband services for businesses and consumers.
While many stocks are priced for perfection with the bull market sustaining its momentum, Ares Capital and Verizon have attractive valuations. Ares' forward price-to-earnings ratio is below 9.2, compared to a multiple of 15.5 for the S&P 500 financial sector. Verizon's shares trade at a little over 9 times forward earnings. By comparison, the forward earnings multiple for the S&P 500 communication services sector is over 19.2.
A few risks
No stock is perfect. Ares Capital and Verizon are no exceptions. Both stocks have a few risks.
As a lender, Ares faces the possibility that its borrowers will default on their loans. This risk could increase if the U.S. economy experiences a major downturn. Capital markets can be highly volatile at times even when the economy doesn't falter.
Verizon has intense competition in the telecom market. The company must invest heavily to deploy new technology such as 5G networks. Its growth could be derailed by an economic decline.
However, both Ares and Verizon appear to be in great positions to continue paying and growing their dividends. There's arguably nothing more important for income investors.
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Keith Speights has positions in Ares Capital, Berkshire Hathaway, and Verizon Communications. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
