With most growth stocks getting hammered this year, many investors are likely considering adding more dividend stocks to their portfolios. After all, even if these stocks fall, most quality dividend-paying companies will still send quarterly payments to shareholders. Indeed, many dividend stocks continue increasing their dividend payouts during bear markets and even recessions.
As investors look for good ways to beef up their portfolios with some income, a good place to hunt for ideas is the holdings of Berkshire Hathaway(NYSE: BRK.B)(NYSE: BRK.A) -- the holding company led by famed investor Warren Buffett. With a long history of market outperformance, there's a good chance that dividend stocks in Berkshire's equities portfolio represent some of the best ideas in the market.
Here are two high-yield dividend stocks in Berkshire's portfolio worth considering.
Ally Financial
Direct-to-consumer banking company Ally Financial(NYSE: ALLY) currently boasts a dividend yield of nearly 4.2%. The company is also returning cash to shareholders through an aggressive share repurchase program. For the last two quarters, the online bank has been repurchasing about $600 million worth of its shares per quarter, with total cash spent on buybacks this year at $1.2 billion.
Berkshire has been aggressively buying up Ally's shares. After initiating a small position in the first quarter, Berkshire more than tripled its position in the company by the end of the second quarter, bringing the total value of the disclosed stake close to $900 million at the time of this writing.
No wonder Berkshire has been buying shares. If Ally keeps up its current pace of share repurchases, the company could reduce its share count by about 25% by the end of the year. And it can pull this off while paying a substantial dividend.
Looking ahead, Ally's dividend payout could increase, continuing a trend of strong dividend growth recently. Ally's current quarterly dividend of $0.30 is actually up 58% year over year since the company increased its dividend twice in a 12-month period recently. Given the company's payout ratio (dividend payouts as a percentage of earnings) of just 20%, Ally looks poised to be able to easily boost its dividend again soon.
HP
An even larger investment Berkshire has made in a new high-yield dividend investment this year is personal computing company HP(NYSE: HP). Berkshire's stake in the company is currently valued at nearly $3 billion. The tech company, which sells computers, printers, and related products and services, currently has a dividend yield of 4%. Furthermore, the tech stock has a cheap valuation. HP stock has a price-to-earnings ratio of less than five.
Like Ally Financial, HP has the fundamentals to support continued dividend growth. The company is currently only paying out 16% of its earnings in dividends.
Sure, Ally's and HP's earnings could both decrease materially in the coming quarters, increasing their payout ratios. Both companies have arguably benefited from elevated demand profiles recently, with Ally profiting from growth in used car loans and HP seeing rapid growth in personal computer sales as the world became more reliant on technology during the COVID-19 pandemic.
But even if these two companies' net income levels normalize to lower levels, their cheap valuations have arguably already priced this in. Furthermore, both stocks' high dividend payouts appear to be quite secure. Investors in these companies, therefore, will likely get paid well to be shareholders.
While there are undoubtedly things that can go wrong for both of these companies, their stocks' attractive valuations and high dividend yields help make up for the risks of owning these high-yield Warren Buffett dividend stocks.
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Ally is an advertising partner of The Ascent, a Motley Fool company. Daniel Sparks has positions in Berkshire Hathaway (B shares). His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
