2 Warren Buffett Stocks That Are Raising Their Dividends and 1 That Isn't

Legendary investor Warren Buffett and his company Berkshire Hathaway (BRK.A -0.91%) (BRK.B -0.93%) have invested in many stocks over the years that pay good passive income. In fact, Buffett and Berkshire seem to love dividend-paying stocks, because over the long haul this is consistent income generation they can count on even when there is lots of market volatility.

Berkshire’s portfolio today still holds many stocks that pay healthy dividends. Here are two stocks in Berkshire’s portfolio that are raising their dividends and one that isn’t.

1. Bank of America: Raising

The second largest bank in the U.S. by assets, Bank of America (BAC -2.02%), recently announced that it plans to pay a quarterly dividend of $0.22 per share at the end of September. The new dividend represents a nearly 5% hike from last quarter.

That brings Bank of America’s dividend yield at its current share price of $33.43 to about 2.6%. That’s solid, but considering that Bank of America’s stock price is down more than 27% this year, the dividend yield won’t look nearly as good if shares rebound. 

If you annualize Bank of America’s new quarterly dividend of $0.22 and take analyst estimates for earnings this year of $3.19, that gives Bank of America a payout ratio of about 27.5%. Considering most banks pay out dividends in the 30% to 40% range and that Bank of America is expected to grow earnings next year, that leaves plenty of room for future growth. Bank of America has paid a dividend every year since 2013.

Shareholders may see more modest capital distributions in the near term, however, as Bank of America will need to build capital to meet higher regulatory capital requirements next year. 

2. Bank of New York Mellon: Raising

I feel like it doesn’t get the same love or notoriety as other Buffett stocks, but the custodian bank and investment management firm Bank of New York Mellon (BK -2.12%) makes up nearly 1% of Berkshire’s nearly $340 billion equities portfolio.

Bank of New York Mellon recently announced plans to increase its quarterly dividend to $0.37, which will be paid on Aug. 5. That represents a nearly 9% increase from the bank’s second-quarter dividend. Its stock is currently trading at around $42.72, so that would give Bank of New York Mellon a dividend yield of 3.5%, which is very solid.

With analysts expecting Bank of New York Mellon to earn $4.24 this year, that would give the bank a payout ratio of 35%. But the bank is also expected to grow earnings in 2023. Bank of New York Mellon has also consistently paid a dividend since 2013.

3. Citigroup: Holding steady

As a somewhat new addition to Berkshire’s portfolio this year, Citigroup (C -1.46%) recently said it would maintain its quarterly dividend of $0.51, and it may stay that way for the foreseeable future. Even so, Citigroup’s dividend yield sits at more than 3.9%, which is more than any of its peers.

With a payout ratio of nearly 23%, Citigroup has room to grow its dividend, in theory, although I don’t think it will for a while. Like Bank of America, Citigroup is facing higher regulatory capital requirements next year and therefore has to build capital, which will make increasing its dividend or conducting share repurchases very unlikely this year.

Even if it had the capital, management would probably opt to conduct share repurchases instead of raising its dividend because the bank currently trades at a significant discount to its tangible book value (TBV), or its net worth, so any share repurchases would grow TBV. Banks trade relative to their TBV, so a growing TBV can usually lead to stock price appreciation. 

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Citigroup and has the following options: long January 2024 $80 calls on Citigroup. 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.

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