Warren Buffett Is Generating an Annual Yield of 33% to 60% From 3 Magnificent Stocks — Here’s His Simple Secret to Outsize Yields

For almost 60 years, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has been delivering outsize returns. Based on the closing price of Berkshire’s Class A shares (BRK.A) on Oct. 10, he’s overseen a nearly 5,500,000% aggregate return and watched his company (briefly) hit the trillion-dollar mark, which is something only eight publicly traded companies have accomplished.

The Oracle of Omaha’s secrets to success really aren’t secrets at all. Whether it’s through his annual letter to shareholders, shareholder meetings, or rare interviews with financial media, Buffett willingly discusses the traits he looks for when putting his company’s capital to work.

American Express: 33% annual yield to cost

A second longtime holding in Berkshire Hathaway’s portfolio that’s responsible for an outsize yield is credit-services provider American Express (NYSE: AXP), which is better known as “AmEx.”

AmEx has been a continuous holding for Buffett’s company since 1991, with Berkshire sporting a cost basis in the company of about $8.49 per share. Although AmEx doesn’t increase its dividend on an annual basis like Coca-Cola, it has boosted its payout notably over time. The $2.80 per share that’s being paid out annually ($0.70 per quarter) equates to a 33% yield relative to cost for Buffett’s company.

Warren Buffett is a huge fan of financial stocks because they’re cyclical. Even though recessions are a normal part of the economic cycle, they resolve quickly. Financial stocks like AmEx are usually able to take advantage of economic expansions lasting disproportionately longer than downturns.

What’s arguably even more important for American Express is being able to take advantage of both sides of a transaction. It serves as the third-largest payment processor in the U.S. by credit card network purchase volume, which allows it to collect fees from merchants. Additionally, it generates annual fees and interest income by acting as a lender via its credit cards.

Lastly, AmEx has historically done a phenomenal job of attracting high-earning cardholders. The well-to-do are less likely to alter their spending habits, regardless of what the U.S. or global economy throw their way.

Moody’s: 34% annual yield to cost

The third high-octane stock that Warren Buffett is generating a jaw-dropping yield to cost on is ratings agency Moody’s (NYSE: MCO).

Patience is the theme of this list. Moody’s has been a pillar in Berkshire’s portfolio since being spun off from Dun & Bradstreet in 2000. Over that time, Moody’s base annual payout has grown to $3.40 per share. With Berkshire’s cost basis in Moody’s a minuscule $10.05 per share, it means Buffett’s company is netting a cool 34% yield, relative to cost.

For more than a decade, Moody’s Investors Services benefited immensely from historically low interest rates. Businesses and governments were eager to raise capital at attractive rates, which kept Moody’s ratings agency busy.

But with interest rates climbing at a rapid clip since March 2022, it’s the company’s Analytics segment that’s now driving its growth. This is the segment responsible for assessing risk management and offering compliance solutions to its customers. With a couple of predictive indicators suggesting trouble is on the horizon, such as the first meaningful decline in M2 money supply since the Great Depression and the longest yield-curve inversion in history, risk management solutions should remain a hot commodity.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Moody’s. The Motley Fool has a disclosure policy.

Warren Buffett Is Generating an Annual Yield of 33% to 60% From 3 Magnificent Stocks — Here’s His Simple Secret to Outsize Yields was originally published by The Motley Fool