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When interest rates are as low as they are right now, currently under 2%, investors have to turn to stocks to find higher yields.
But according to Warren Buffett, chair of Berkshire Hathaway Inc. (NYSE: BRK.B), chasing after yield with risky or exotic investments is, well, just plain stupid.
While the Oracle of Omaha hits the nail on the head most of the time, we think he's a little short of the mark here. In fact, just like Buffett's preaching of passive investing, he doesn't always follow his own advice, and that's the case here too.
Today, we'll show you why Buffett doesn't follow his own advice, including three dividend stocks that can offer you healthy yield and upside potential...
Why Buffett Likes Dividend Stocks
Now, Buffett isn't completely wrong here.
What he means is that investors should always live within their risk tolerances and personal financial situations. Sometimes that means discarding tried and true safe investments in favor of taking on higher risk. That could mean buying a 10-year bond vs. a 1-year bond. Or it could mean limited partnerships investing in cancer cures or Hollywood blockbusters.
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Grandma living on a pension should not be buying natural gas well leases. Or even junk bonds. That little bit of extra promised return may not be worth it if the investment goes south.
Retirees, especially, need to be careful. If they were used to getting 8% on their money and now they are barely getting 1% or 2%, they could end up losing a lot more if they chase riskier assets.
Remember, a high yield investment only works when it doesn't go bankrupt. After all, it's only a promised rate of return. There are no guarantees.
That's why we like to invest in some of the best dividend stocks on the market. While stocks require a higher risk tolerance than a savings account, a reliable dividend-paying stock can provide you stable returns.
In fact, it's something Buffett looks for himself.
Berkshire looks for stocks that reward shareholders, with both price appreciation and with healthy dividends. Buffett even negotiated a much larger dividend for Berkshire's shares of Occidental Petroleum Corp. (NYSE: OXY) when that deal was in the works. He purchased $10 billion in Occidental preferred stock that paid an 8% dividend in order to help Occidental buy out Anadarko Petroleum back in April, 2019. Retail investors had no shot at getting this yield.
That's important because the income from the investment gave Berkshire returns even as the market was volatile.
He wasn't worried when shares in OXY and in energy stocks in general fell apart last year. Berkshire shareholders were enjoying that nice, fat 8% dividend payment while they waited for the rally. And Berkshire also started to snap up common shares in the company for cheap.
But opportunistic buying aside, it's really a very simple concept. Dividends are great for investors and are often a sign the company is stable enough to own over the long haul. That's why we don't follow Buffett's advice on accepting the 1% return from your savings account.
The good news is that you don't have to be Warren Buffett to be a prudent investor. And you don't have to take on huge risks to get yields. There are plenty of stable, well-run businesses that reward investors with healthy total returns.
Here are three of our favorites...
3 of the Best Dividend Stocks with Upside
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Although it's still one of the premier tech stocks in the world, Apple Inc. (NASDAQ: AAPL) also pays a dividend yield of 1.1%. It doesn't look like much, but it is just gravy on top of a stock that doubled last year alone. As one of the handful of stocks valued at more than $1 trillion - with a "t" - it's also a major player in the economy. Do you know anyone who does NOT have an Apple product in their homes, from iPhones, to iPads, to iMacs, to Apple Watches? Does anyone you know use iTunes, Apple TV, or iCloud services?
Even though the company's supply chain is under pressure from the coronavirus, its long-term trend remains to the upside. In fact, with a 10% correction under its belt, it has already worked off the overbought condition it was in earlier this month. In other words, weak hands were shaken out, bringing the share price back down to more reasonable levels.
Make no mistake: The market is volatile right now. Some of its leaders rallied too far, too fast, including Apple. But a good pullback is healthy for long-term investors.
Another blue-chip stock with a nice combination of growth and income is Johnson & Johnson (NYSE: JNJ). With a 2.6% dividend yield, JNJ outperformed the S&P 500 since bottoming last October and even through the current market's decline.
Johnson & Johnson is a healthcare and pharmaceuticals company. Its consumer segment includes products used in the baby care, oral care, beauty, and wound care markets. The pharmaceutical segment focuses on immunology, infectious diseases, vaccines, and more. The medical devices segment manufactures orthopedic, surgical, cardiovascular, diabetes care, and eye health products. Basically, it is another company that touches the lives of most of us.
As a Dividend Aristocrat, Johnson & Johnson has increased its dividend for 57 straight years. That's a sign of reliability we like to see, and it means the income will keep pace with growth over time.
Real estate investment trusts (REITs) are more in line with what investors think of as being a dividend producer. Most have built in to their stock covenants that they must pay out, or pass through, perhaps 90% of their income to investors in the form of dividends.
We like Vornado Realty Trust (NYSE: VNO) and its 4.6% dividend yield. Vornado operates office buildings, including some in the very tight Manhattan market. It's a who's who that includes Amazon's NYC headquarters at 7 West 34th Street, Bloomberg's NYC headquarters at 731 Lexington Avenue, Neuberger Berman NYC headquarters at 1290 Avenue of the Americas, and more than 10 million square feet in the Penn District, NYC, including One Penn Plaza.
To be sure, shares took a beating over the past week after releasing fourth-quarter 2019 earnings. While it beat analyst estimates on revenue, the stock was pummeled, losing 15.2% in just six days. Of course, the general market decline exacerbated this drop, but regardless, the stock is now sharply oversold. That means it is likely to be a bargain at these levels.
With the U.S. Federal Reserve prepared to keep interest rates lower for longer - and the central bank pumping cash constantly into the system - investors and speculators are turning toward assets like buildings, land, and other real estate. And that means REITs like Vornado.
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