You might think that Warren Buffett and ultra-high-yield dividend stocks go together like peanut butter and watermelon. In other words, they don't.
By the way, my definition of "ultra-high" is any yield that's at least four times the yield of the S&P 500. Currently, that puts the threshold at close to 6%. Believe it or not, though, Buffett owns several stocks with such exceptionally high dividend yields.
Granted, not all of them are in Berkshire Hathaway's(NYSE: BRK.A)(NYSE: BRK.B) portfolio. Some are owned by Berkshire subsidiary New England Asset Management (NEAM). But that nonetheless means that the Oracle of Omaha has a stake in them.
Here is every ultra-high-yield dividend stock Buffett owns, ranked from best to worst. (Note: This ranking is based on my admittedly subjective views about their ability to deliver solid total returns over the next few years.)
1. Ares Capital
Ares Capital(NASDAQ: ARCC) is the largest publicly traded business development company (BDC). Its dividend yield currently stands at a hair below 10%.
The stock has handily outperformed the S&P 500 since its IPO in 2004. Ares Capital appears to have solid growth prospects going forward as middle-market businesses increasingly turn to it to raise capital.
2. Vitesse Energy
Buffett arguably likes Vitesse Energy(NYSE: VTS) the most of any stock on this list right now. Why? It's the only one that he's bought recently.
The legendary investor no doubt likes Vitesse's dividend yield of more than 8.7%. He also probably finds the company's business model attractive. Vitesse doesn't operate oil and natural gas wells, but it owns financial interests in them.
3. Verizon Communications
Verizon Communications(NYSE: VZ) isn't in Berkshire's portfolio any longer (Buffett exited the position in 2022), but NEAM still owns it. And the telecommunications giant still offers a juicy dividend yield that tops 7.6%.
I think Verizon's dividend is safe. I also expect that the stock can bounce back after a dismal beginning in 2023. Verizon plans to reduce its debt as well as likely extend its nice streak of 16 consecutive years of dividend increases.
4. Kinder Morgan
Kinder Morgan(NYSE: KMI) is a leading midstream energy company that offers a dividend yield of more than 6.5%. The company's 70,000 miles or so of pipelines deliver roughly 40% of U.S. natural gas.
Those pipelines and other assets enable Kinder Morgan to generate steady cash flow that it uses to fund the dividend program and invest in growth projects. I think one of those initiatives -- carbon capture and sequestration -- could hold especially significant potential.
5. KeyCorp
Buffett isn't the fan of bank stocks that he used to be. However, NEAM continues to own shares of KeyCorp(NYSE: KEY). Although the stock hasn't done much for investors lately, its attractive dividend yield of over 8% has cushioned the impact somewhat.
KeyCorp's valuation looks much more appealing now, with shares trading at a forward earnings multiple of only 7.3x. I suspect the stock could be volatile for a while until the dust fully settles from the banking crisis that began earlier this year. However, my prediction is that this beaten-down stock will rebound strongly sooner or later.
6. Golub Capital BDC
Like Ares Capital, Golub Capital BDC(NASDAQ: GBDC) is a BDC in NEAM's portfolio. Its dividend yield of 9.8% lags only narrowly behind Ares Capital.
I think the same dynamics that are favorable for Ares Capital should work to Golub's advantage, too. However, Golub Capital doesn't have nearly as strong of a track record at delivering market-beating total returns over the long run.
7. AT&T
We've already had one telecom giant on the list, but there's room for one more. Buffett owns shares of AT&T(NYSE: T) through NEAM's stake in the company. As it has been for decades, AT&T remains a favorite for income investors with a yield of nearly 7.7%.
I've ranked AT&T at the bottom of Buffett's ultra-yield dividend stocks for a couple of reasons. First, the company's growth is slowing (due in part to increased competition from Verizon and others). Second, AT&T's exposure to litigation over its lead telephone lines could be problematic.
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Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway, Kinder Morgan, and Vitesse Energy. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
