Investing in dividend stocks is considered a solid strategy for various reasons. Companies that pay dividends are often more resilient compared to those that do not, and the regular payouts can help offset losses, particularly during bear markets—a concern for many investors who anticipate such downturns.
It is unsurprising that Warren Buffett includes shares of excellent income-generating companies in his investment approach. Buffett, regarded by many as the greatest investor of all time, holds numerous dividend-paying stocks in Berkshire Hathaway’s portfolio. Two such stocks, considered worth holding indefinitely, are Apple (AAPL) and Visa (V).
Apple (1)
Apple is currently one of the stocks most closely associated with Warren Buffett, aside from Berkshire Hathaway itself. For years, the technology company has been the largest holding in Buffett’s portfolio, with him once lauding Apple as the best business globally—a significant commendation.
Apple is renowned for several strengths, including its economic moat, a critical factor for Buffett when selecting investments. This moat is built on various foundations, such as the company’s strong brand name. The tech giant has cultivated customer loyalty, with many consumers viewing a switch from Apple to other brands, like Android, as a downgrade. Moreover, Apple’s ecosystem benefits from high switching costs, requiring customers who wish to change platforms to transfer large amounts of data and sacrifice the integrative benefits of Apple’s interconnected devices.
Apple continues to report impressive revenue, profits, and cash flow. Although top-line growth is less rapid than in previous years, the company has various potential growth avenues. With over 2 billion devices currently in use, Apple has numerous opportunities for monetization. Its ecosystem also comprises more than a billion paid subscriptions. While iPhone sales still dominate its revenue, Apple’s services segment has been its fastest-growing division and presents multiple long-term growth opportunities.
Additionally, Apple is advancing in artificial intelligence, incorporating it into recent devices and exploring further applications to enhance its ecosystem. Despite a market cap exceeding $3 trillion, Apple maintains impressive long-term prospects. Its dividend program further enhances its appeal, with a current forward yield of 0.5% (compared to the S&P 500’s average of 1.3%). Over the past decade, the company has increased its payout by 92.3%. With a conservative cash payout ratio of 14%, it is positioned to continue significant dividend hikes, making Apple a reliable long-term choice.
Visa (2)
Visa dominates the global payment network industry, with over 4 billion credit and debit cards worldwide adorned with its emblem. More than 150 million businesses accept Visa as a payment method. The company itself does not issue these cards; issuing banks perform this role. Instead, Visa facilitates the processing of card payments through its network, earning a fee for each transaction—of which there are millions daily. Visa’s economic moat derives from the network effect: as more consumers obtain Visa-branded cards, more businesses find it logical to accept them, thus enhancing Visa’s profitability and limiting direct competition.
The trend of moving away from cash and checks towards credit and debit cards further contributes to Visa’s success. Cards offer greater convenience than cash, allowing individuals to carry substantial sums without physical bulk. Additionally, while a stolen wallet of cash can be easily misused, a lost card can be quickly deactivated with modern technology like smartphone apps.
The ongoing shift away from cash presents a valuable long-term growth opportunity for Visa, as substantial cash and check transactions still occur worldwide, particularly outside the U.S. Consequently, Visa’s market presence is far from its peak. Over the past decade, Visa’s management has increased dividend payouts by a notable 391.7%. Although its forward yield stands at only 0.7%, the company’s cash payout ratio of 22.6% indicates room for further dividend growth, making Visa an attractive choice for both growth and income-seeking investors.
