Income investors can find plenty of sources for investment ideas. One that many might overlook is Warren Buffett. Although the Oracle of Omaha isn't an income investor, his portfolio includes quite a few attractive dividend stocks.
A filing to the U.S. Securities and Exchange Commission revealed last week that Berkshire sold 5.5 million shares of?HP (HPQ 0.51%). Neither Buffett nor any other Berkshire spokesperson commented publicly on the transaction.
Berkshire first initiated a position in HP in April 2022, when it bought 109.8 million shares of the PC and printer maker. The conglomerate scooped up additional shares of HP in subsequent quarters.?
However, HP has been a loser for Buffett, and the future doesn't look all that promising, either. HP reported that its net revenue fell nearly 10% year over year in its fiscal 2023 third quarter. The company also reduced its full-year earnings guidance.?
Berkshire still owns 11.7% of HP, though. The stock also continues to generate plenty of dividend income, with its yield of over 3.8%.
Buffett's ultra-high-yield winner
Income investors have a much better Buffett dividend stock to consider than HP. This one won't be found in Berkshire Hathaway's regulatory filings, though. Instead, it's owned by Berkshire's subsidiary, New England Asset Management.?
Ares Capital (ARCC -0.87%) ranks as the largest publicly traded business development company (BDC). It provides financing to middle-market businesses that often encounter challenges securing capital from banks. While Ares Capital isn't a Buffett pick, the legendary investor owns shares of the BDC just as much as he owns shares of any position in Berkshire's portfolio.
If you like HP's dividend, you'll probably love Ares Capital. With its yield just a hair beneath 10%, this isn't just a high-yield dividend stock -- it's an ultra-high-yield stock.
The first question that might come to mind with such a high yield, though, is: Is Ares Capital's dividend also ultra risky? The good news is that it isn't. Ares Capital's dividend has been stable or has grown for more than 13 consecutive years. The company has also delivered the highest base dividend growth of any externally managed BDC that's been publicly traded for at least 10 years and has a market cap of over $700 million.
Sometimes stocks with exceptionally high dividend yields aren't great picks for investors because they lose value over time. That isn't the case with Ares Capital. The stock has generated a total return since its IPO in 2004 that's around 70% higher than the S&P 500. Over the last three years, Ares Capital's total return has more than doubled that of the S&P 500.
You might think that Ares Capital would come with an ultra-high valuation with this kind of outperformance. Nope. The stock currently trades at only 8.5 times forward earnings.
A no-brainer buy?
There's no guarantee that Ares Capital will be as successful going forward as it has been in the past. A major economic downturn, for example, could cause financial difficulties for the BDC's borrowers and lead to an increase in the number of defaults.
Still, I like Ares Capital's risk management strategy. It has built a well-diversified portfolio across 475 companies that operate in multiple industries. Ares Capital avoids exposure to several cyclical industries that could increase its risk. And it focuses mainly on the upper end of the middle market.
I think that Ares Capital is a no-brainer buy for many income investors. You won't find many stocks with a more attractive dividend yield combined with outstanding total returns over the long term and a compelling valuation.?