IInvestors looking for a way to generate passive income have many options, but few are as simple as buying dividend-paying stocks and collecting quarterly installments. There’s a lot to choose from and simply chasing the highest yield isn’t always a good game plan.
When selecting stocks to provide a steady stream of income during your retirement years, it’s important to find companies with strong competitive advantages that will allow them to steadily increase their payouts year after year. You can browse the stock market on your own or you can follow the example of legendary investor Warren Buffett. Since taking control of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) in 1965, shares of the holding company appreciated at a compound annual growth rate of 19.7%.
These stocks are important parts of Berkshire Hathaway’s portfolio and they all offer relatively high yields of 4.1% at recent prices. Here’s how they could pay growing dividends to your brokerage account.
Chevron (NYSE: CVX) is an integrated oil and gas giant that Buffett has been betting big on in the first three months of 2022. It’s now the fourth-largest holding in Berkshire’s stock portfolio. At recent prices, the stock offers a nice yield of 4.1% which could grow significantly with the rising cost of oil.
Chevron’s oil production business is designed to generate strong profits. In March, the company told investors it could increase its dividend and reduce its debt even if the price of oil fell to just $50 a barrel and stayed there for the next five years. At $75 a barrel, the company thinks it can increase its payout and buy back more than 25% of outstanding shares. Right now, oil is trading around $98 a barrel after spending about four months above $100 a barrel.
The future is uncertain, but we can be relatively confident in Chevron’s ability to weather another storm. Lower oil prices may put pressure on the company’s production segment, but it also reduces input costs for the company’s refining and chemical operations. With a diversified operation that can adapt to changes in the market, investors can look forward to years of increasing dividend payouts from this stock.
2. American Bancorp
American bank (NYSE:USB) is the parent company of US Bank, a relatively large regional bank with primarily traditional and commercial banking operations. Currently, the stock is yielding 4.1% which positions itself for strong growth in the years to come.
Contrary to JPMorgan Chase and other mega-banks, US Bancorp does not have an investment banking division. This focus on traditional banking has made the low interest rate environment of the past decade particularly challenging, as low rates don’t leave much room for profit. Despite the challenge, this well-run bank has been able to increase its dividend payout by 136% over the past decade.
Now that rates are on the rise, however, this bank’s earnings growth could accelerate. US Bancorp earns most of its money as net interest income. It is essentially the difference between interest paid to depositors and interest received from lenders. In April, the company said net interest income would rise about 3.3% if the Federal Reserve gradually raised interest rates by 2%. In June, the consumer price index rose a frightening 9.1% year over year, which will most likely prompt the Federal Reserve to hike rates more than 2% before the end. of the year.
Growing fears of a recession pushed US Bancorp’s share price to just 1.5 times its book value. With the exception of the last nine months of 2020, this is a lower valuation than this stock has seen in over a decade. While a recession could limit lending activity in the coming quarters, they rarely last very long. Economic recoveries, on the other hand, usually last for years at a time. With interest rates and time on its side, this banking stock has a very good chance of producing above-market gains over the long term.
10 stocks we like better than Chevron
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Cory Renauer has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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