High dividend stocks are in with most S&P 500 investors. But investors seem to think Warren Buffett's taste in these kinds of stocks is, well, a little off.
Ten of the high-yield U.S.-listed stocks in Buffett's Berkshire Hathaway portfolio, including materials firm Celanese, financial Ally Financial and consumer discretionary Paramount Global, are all down 20% or more this year, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
This is actually a pretty poor showing for Buffett this year — a year where dividends have largely protected investors from giant losses. Berkshire Hathaway owns 17 U.S.-listed stocks that yield more than the S&P 500's 1.7%. But of Buffett's high-yield picks, more than half are still down 20% this year. That's much worse than the 8.9% decline this year by the SPDR S&P Dividend ETF.
Choosing S&P 500 dividend stocks wisely is as important as ever. Dividends continue to be one of the only forms of growth now, and the picking is getting trickier.
"Dividend increases continue at record levels," said S&P Dow Jones Indices' senior index analyst Howard Silverblatt. But "the risk-reward trade-off has shifted from the start of the third quarter, as the market decline has moved investors to more secure, less volatile equity dividend producing companies as dividends serve as anchors, slowing the decline."
Buffett's Conflicted Take On S&P 500 Dividends
Buffett is the master of value investing, and dividends are a big part of that. Unfortunately, though, many of the dividend stocks owned by Berkshire Hathaway seem to only be ones Buffett could love.
Just look at the statistics. Most of Berkshire Hathaway's U.S.-listed holdings, approximately two-thirds, pay a dividend. And he likes high dividends, too. More than half of Berkshire Hathaway's dividend paying stocks yield more than the S&P 500.
But the biggest problem for Buffett is that most of those just aren't working out. And that's troubling in a year where dividends and income are king.
Buffett's Biggest High-Dividend Dud: Celanese
Celanese, a maker of high-tech polymers, is Buffett's biggest high-yield misfire this year.
Buffett owns more than 8.4% of the company, whose stock yields nearly 2.9%. That's nearly twice the S&P 500's yield. And yet, the stock has gone nowhere but down, and fast, this year. It's off more than 40% this year, while the S&P 500 is off just 20%. Berkshire Hathaway is in the stock, big. It's the second largest investor.
What's the problem with the stock? The company's profitability is shrinking, despite its big dividend. Analysts think the company will only earn $17.93 a share this year. If they're right, that marks a 1% profit contraction. And in 2023? The company's profit is seen falling another 15%. And that's why investors, other than Buffett, aren't impressed.
Buffett Burned Chasing Yield In Financials, Media
And Buffett's yield-chasing in S&P 500 financials has ended up just as poorly.
Take Ally Financial, one of Berkshire Hathaway's new favorites in the sector. Buffett's company owns nearly 10% of the company, which yields an impressive 4.1%. Nonetheless, shares are off a crushing 35% this year. That makes the S&P 500's loss this year look small. That hurts, as Berkshire Hathaway is the No. 2 largest holder of shares.
Ally, too, is just one high-dividend financial play burning Buffett. Half the big-yielding duds in Berkshire Hathaway's portfolio hail from the financial sector.
Resisting yield, though, is tough. And Buffett most likely loves the 4.9% yield paid by Paramount Global. The media and entertainment company's yield is among the largest in Berkshire Hathaway's portfolio. But holding the stock for a dividend has stung. Shares of the stock are down more than 30% this year. And profit is seen dropping by more than a third this year. Too bad Berkshire Hathaway owns nearly 13% of the company and is the No. 1 shareholder.
Buffett's Tortured Dividend Record
To be sure, part of a year isn't long to measure success in owning high-yield stocks. And, on the other hand, dividends don't seem to be Buffett's sole priority. His company, Berkshire Hathaway, remains one of the most-valuable firms in the S&P 500 that doesn't pay a dividend itself. Additionally, Buffett's No. 1 holding, Apple, yields just 0.6% — a fraction of what the S&P 500 pays.
But seeing Buffett chase yield, and get burned in a good market for dividend stocks, is a tell on the difficulty of this type of investing strategy.
Big Dividends Burn Buffett
U.S.-listed Berkshire Hathaway holdings down 20% or more this year despite yielding more than the S&P 500
| Company | Symbol | Dividend yield | Stock YTD % ch. | Sector |
|---|---|---|---|---|
| Celanese | 2.9% | -42.3% | Materials | |
| Ally Financial | 4.1 | -35.3 | Financials | |
| Paramount Global | 4.9 | -33.5 | Communication Services | |
| HP | 3.9 | -29.3 | Information Technology | |
| Bank of New York Mellon | 3.7 | -28.8 | Financials | |
| Bank of America | 2.8 | -27.2 | Financials | |
| Citigroup | 4.8 | -26.5 | Financials | |
| U.S. Bancorp | 4.6 | -24.1 | Financials | |
| United Parcel Service | 3.7 | -21.2 | Industrials | |
| Procter & Gamble | 2.8 | -20.5 | Consumer Staples |
Sources: IBD, S&P Global Market Intelligence based on S&P 500's current 1.7% dividend yield
Follow Matt Krantz on Twitter @mattkrantz
