Berkshire Hathaway‘s record-high cash stockpile might give some investors the wrong impression. Warren Buffett isn’t completely avoiding buying stocks. Granted, he’s being very selective — but that’s nothing new for the legendary investor.
Buffett recently bought eight stocks. And I think one of them is the best of the bunch for income investors.
All the stocks Buffett bought
Buffett initiated new positions in two stocks during Q2. He bought over 1 million shares of Heico. This marked the first time the aerospace and defense stock has been part of Berkshire’s portfolio.
The second quarter also brought Buffett’s first transaction involving Ulta Beauty. He bought over 690,000 shares of the cosmetics retailer worth around $266 million at the end of Q2.
Berkshire increased its stakes little in several existing holdings in Q2: Chubb Limited, Occidental Petroleum, Liberty Media Series A, and Liberty Media Series C. It also significantly boosted its position in audio entertainment company Sirius XM Holdings (NASDAQ: SIRI).
Finally, Buffett bought himself a birthday present in August (he turned 94 on Aug. 30, 2024). After trimming Berkshire’s position in Bank of America (NYSE: BAC) earlier this year, he recently added more shares of the big bank.
A process of elimination
A simple process of elimination to rule out several of Buffett’s recent buys for income investors. The two Liberty Media stocks don’t pay dividends. Neither does Ulta Beauty.
Heico pays a dividend, but I doubt income investors would even give it a moment’s thought. Its forward dividend yield is a puny 0.089%.
Chubb presents a somewhat tougher decision. Its forward dividend yield of 1.27% is low. On the other hand, the property and casualty insurer has increased its dividend payout for 31 consecutive years. My view, though, is that Chubb’s yield isn’t enough to be attractive to most income investors.
Occidental Petroleum pays a dividend yield of 1.59%. That’s getting closer to a level that might entice some income investors. However, Oxy’s dividend track record isn’t that great. The company has increased its dividend for only three consecutive years. It slashed the dividend in 2020 because of the impact of the COVID-19 pandemic.
The best of the bunch for income investors
That leaves two remaining candidates: Bank of America and SiriusXM. At first glance, SiriusXM might appear to be the best pick with its high forward dividend yield of 3.41%. However, I think Bank of America is the best of the bunch for income investors for several reasons.
BofA’s forward dividend yield of 2.56% is attractive. More importantly, the dividend is growing. Bank of America has increased the dividend for 11 consecutive years (longer than SiriusXM’s six years of consecutive dividend hikes).
SiriusXM’s declining free cash flow in recent years is concerning. That’s not a trend income investors like to see. Meanwhile, Bank of America’s free cash flow has grown by leaps and bounds.
That’s not the only problem for SiriusXM. The company’s revenue declined 3% year over year in the second quarter of 2024. Its satellite radio segment’s self-pay subscribers also fell by around 100,000 year over year in Q2.
Perhaps the biggest challenge for SiriusXM is the huge increase in competition from digital content providers. Satellite radio is still appealing to many people, but the wide range of free podcast offerings can present an alluring alternative.
Sure, Bank of America faces some threats from online banks and other digital competitors. However, it’s responded well in recent years, as evidenced by BofA being recognized as the “Best Consumer Digital Bank in the U.S” in 2023 by Global Finance and the “World’s Best Digital Bank” by Euromoney.
Buffett is buying both Bank of America and SiriusXM, so he obviously thinks positively about both stocks. However, I think it speaks volumes that Bank of America is Berkshire’s third-largest position with a value of nearly $36 billion while SiriusXM is a much smaller position worth less than $415 million.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Bank of America, Berkshire Hathaway, and Chubb. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and Ulta Beauty. The Motley Fool recommends Heico and Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett Recently Bought 8 Stocks. Here’s the Best of the Bunch for Income Investors. was originally published by The Motley Fool
