1 Warren Buffett Dividend Growth Stock That Deserves a Place in Your Portfolio

Warren Buffett, the CEO Berkshire Hathaway (BRK.A -0.17%) (BRK.B -0.15%)he has long been revered as one of the greatest investors of all time. Its ability to consistently beat the market over decades stems from one fundamental principle: investing in high-quality businesses with sustainable competitive advantages that generate consistent long-term returns.

One of the stocks that exemplifies Buffett’s investment philosophy is American Express (AXP -2.19%)a company that has been the cornerstone of the Berkshire Hathaway portfolio for decades. American Express first appeared in Buffett’s portfolio in 1964, when he seized an opportunity created by the infamous “salad oil scandal” that had rocked the company’s stock price.

Image source: The Motley Fool.

Although Buffett did not retain his original shares, he later made American Express a significant holding for Berkshire Hathaway beginning in the early 1990s. Today, Berkshire Hathaway owns a substantial 21.3% stake in American Express, making it the second largest holding company’s stock position, surpassed only by Apple.

Here’s why this financial services stock should fit comfortably in most portfolios.

A brand that commands respect

American Express’s heritage dates back to 1850, weathering countless economic storms along the way. The company name has become synonymous with quality, prestige and trust.

This strong brand recognition translates into a loyal customer base, particularly among high-value customers who appreciate the advantages and benefits offered by American Express premium card products.

The company’s resilience through different market cycles demonstrates the strength of the brand and its business model. American Express has constantly adapted to changing consumer preferences and technological advances, maintaining its leadership position in the financial services industry.

A unique business model in the financial sector

Unlike its competitors Visa and MasterCardAmerican Express operates as both a payment network and a card issuer. This dual role allows the company to collect fees from merchants and earn interest income from cardholders. The model gives American Express greater control over pricing, risk management and cross-selling opportunities.

This unique positioning also gives American Express an important competitive advantage. Namely, the company can tailor its offerings to meet the specific needs of both merchants and consumers, creating a more integrated and valuable ecosystem for all parties involved.

Steady growth and shareholder rewards

Over the past decade, American Express has demonstrated its remarkable ability to consistently grow revenue and earnings (see chart below). The company has weathered enormous challenges such as increased competition and regulatory changes while maintaining its upward trajectory. This resilience speaks volumes for the strength of American Express’ business model and management team.

AXP Diluted EPS data (yearly) by YCharts

American Express’s commitment to shareholder value is evident in its aggressive share buyback program and steady dividend growth. The company has reduced its number of shares outstanding by about 30% over the past decade, effectively increasing its earnings per share and dividend growth rate.

While the current dividend yield of 1.15% may seem modest, it is extremely sustainable with a payout ratio of just 19.4%. Dividend sustainability is crucial to building an income snowball over time, and American Express offers a highly reliable cash distribution.

Furthermore, American Express has increased its dividend by an incredible 10.4%, on average, per year over the last ten years. In fact, that’s one of the highest dividend growth rates of any large-cap stock.

This combination of share buybacks and robust dividend growth exemplifies the compounding effect that Buffett looks for in his investments and provides investors with a potentially growing income stream.

Why Most Investors Should Consider American Express

American Express offers investors a compelling combination of brand strength, a unique business model and shareholder-friendly policies. The financial services titan is also in a prime position to capitalize on the ongoing shift to digital payments.

Perhaps most importantly, the company’s ultra-low payout ratio leaves ample room for further increases in its quarterly cash distributions. Meanwhile, its entrenched market position and unique business model provide a solid foundation for long-term capital appreciation.