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Billionaire Warren Buffett owns 45 stocks and ETFs. But only one has a beefy 5% dividend yield.

Billionaire Warren Buffett owns 45 stocks and ETFs. But only one has a beefy 5% dividend yield.

Billionaire Warren Buffett has always had a weakness for companies that return capital to their shareholders. Passive income can turn into huge amounts of wealth and make money productive while investors wait for a stock to appreciate.

Buffett’s company Berkshire Hathaway has several high-yielding stocks in his portfolio. However, of the 45 stocks and exchange-traded funds (ETFs) owned by Berkshire, only one has a dividend yield above 5% – and that’s a stock Buffett has owned for over a decade.

One of Buffett’s biggest mistakes, or the best dividend stocks?

Buffett and Berkshire first became involved in Kraft-Heinz (KHC -0.41%) in 2013, when Kraft Foods and Heinz were separate entities. Berkshire and a private equity firm called 3G Capital bought Heinz. The two men worked together two years later to merge Kraft and Heinz into the company it is today. The investment hasn’t really paid off, with Kraft Heinz shares flat over the past five years and down about 33% overall.

In 2019, Buffett told CNBC he made a mistake. “I was wrong on several counts about Kraft Heinz,” he said on Squawk Box. “We paid too much for Kraft.”

Yet the Oracle of Omaha now owns nearly 27% of the company and represents about 3.3% of Berkshire’s massive $300 billion-plus stock portfolio. Kraft Heinz also pays a healthy dividend yield of 5.18%.

KHC dividend yield data by YCharts.

The dividend payout ratio, which measures dividends paid as a percentage of profits, reached almost 142%, meaning Kraft Heinz is paying out more in dividends than it is generating in profits. That’s not exactly something you want to see as an investor. However, the company suffered heavy impairment losses in its most recent quarter, much higher than normal, and these losses are not essential to the business. Adjusted profit, which excludes impairment losses, actually increased about 4% year-over-year.

Kraft Heinz reported free cash flow of more than $2 billion in the first nine months of the year, up 10% year-over-year. The company pays about $450 million in dividends per quarter. Kraft Heinz has paid a dividend every year since 2012, although it had to cut it in 2019 and hasn’t increased it since.

Is Buffett’s Dividend Horse a Buy?

Given the level of free cash flow, Kraft Heinz’s dividend appears sustainable. Kraft Heinz hasn’t raised its dividend in several years and doesn’t appear to have much room to do so, although I’m sure income investors are happy to collect more than 5% while the company continues to work on its recovery.

Kraft Heinz has paid down much of its debt over the past five years, but its debt still stands at $19.4 billion. Net sales have also declined this year, but the company has a forward price-to-earnings ratio of around 10, which is quite reasonable in today’s market.

Investors will likely need to remain patient for the company to achieve a full turnaround. However, Buffett seems to have all the confidence in the world, with Berkshire having never sold a single stock.

Kraft Heinz is particularly suitable for investors looking for income. The dividend will become more attractive as interest rates fall and investors can no longer earn a 5% yield on Treasury bills and certificate of deposit (CD) accounts.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.