1 Top Warren Buffett Stock for Dividend Investors

Berkshire Hathaway doesn't pay a dividend. However, former CEO and legendary investor Warren Buffett purchased shares in companies that make payouts.

His successor, Greg Abel, has also purchased a dividend-paying stock this year that investors should examine closely. For those seeking dividends with upside potential, Macy's (NYSE: M) fits the bill.

It's a new equity position for Berkshire this year. As of June 30, Berkshire owned 7.3 million shares valued at $173 million.

Berkshire has certainly shown it likes Macy's stock, but here's why the retailer deserves your consideration.

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Supporting dividends

Macy's raised its quarterly dividend by 5% this year. That increased the payout from $0.1824 to $0.1915 per share. The board of directors has raised dividends annually since 2022. Macy's resumed payments in 2021 after taking the understandable step of suspending them in 2020 following the onset of the COVID-19 pandemic.

The sharp increase this year sends a positive signal about the company's confidence in its ability to maintain the higher rate. Still, it's important to check that it can sustain dividends.

A good measure you can use is the payout ratio, or the dividends as a percentage of earnings. Macy's has a comfortable 29% payout ratio, which should reassure investors.

The stock has an above-average dividend yield, too. Macy's shares yield 3.4% compared to 1.1% for the S&P 500. (SNPINDEX: ^GSPC)

Upside potential

Macy's share price gained 29.6% over the last year, through Sept. 8. That beat the S&P 500's 18.4% by 11.2 percentage points.

However, with Macy's in the midst of turning around its business, I think there's more upside potential. Management's "Bold New Chapter" strategy, launched a couple of years ago, included plans to improve the shopping experience, close unprofitable stores, expand its luxury Bloomingdale's and Bluemercury luxury brands, and improve the Macy's brand offerings.

You can see the improvement in the company's sales results. Same-store sales (comps) have been growing, including by 2.8% in the recently reported fiscal second quarter. All brands had positive comps, with Macy's, Bloomingdale's, and Bluemercury posting 1.1%, 11.3%, and 6.2%, respectively.

Importantly, the company's gross margin, excluding tariff refunds, expanded from 41.4% to 41.5%.

Despite these positive results, Macy's shares remain an attractive value opportunity. The stock has a price-to-earnings (P/E) ratio of about 9, a fraction of the S&P 500's P/E of 26.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.