Find Financial Success by Investing Like Warren Buffett

Warren Buffett’s portfolio is concentrated in two sectors. How can you shape your portfolio like his to achieve success in the stock market?

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close-up photo of investor Warren Buffett

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Warren Buffett is undoubtedly one of the most well-known investors of his generation. Stories of his rise from humble beginnings in Omaha to his running of the well-respected Berkshire Hathaway have been told by many. Buffett’s portfolio is highly concentrated within the technology and financial sectors. In this article, I will discuss which companies Canadians can choose to create a similar portfolio in hopes of achieving financial success.

Choose this top tech stock

Although Buffett allocates a large portion of his funds towards the tech sector, much of this capital is invested in Apple. In fact, the company has a 47% weighting in his portfolio. This tells investors that Buffett is comfortable holding a mature, dividend-paying tech company as a foundational position in his portfolio. One comparable Canadian company that investors should look into for a similar position in their portfolio is Constellation Software (TSX:CSU).

Much like Apple, Constellation is a leader within its industry. The company has created a significant network of high-performing, vertical market software companies. Led by former venture capitalist and company president Mark Leonard, Constellation has managed to acquire more than 500 companies since its inception in 1995.

The similarities between Apple and Constellation Software do not end there. Both companies are known for reliable stock appreciation over the long term. Over the past five years, Constellation stock has increased 184%. Although this is much less than Apple’s 297% gain over the same period, Constellation has managed to do so with very little volatility. At the time of this writing, the company has a beta of 0.61. This indicates that its stock is much less volatile than the broader market.

Finally, both companies pay small dividends. Constellation is currently offering a dividend with a forward yield of 0.33%. The company’s payout ratio stands at a mere 22.32%, suggesting that the company has plenty of room to increase distributions in the future.

A top bank company

One aspect of Buffett’s investing style that investors have taken note of is his admiration for dividend-paying companies. Banking companies have been known to be solid dividend payers and also make up the second-largest sector in Warren Buffett’s portfolio.

In his latest filing, it was reported that 26% of Buffett’s $228 billion portfolio was invested in the financial sector. Of these companies, the Bank of America is his largest position. It is the second-largest American bank, by assets, which lends the company to comparisons with TD Bank (TSX:TD)(NYSE:TD).

Surprisingly, the two companies have shown very similar performance over the past five years. Both companies have shown reliable stock appreciation over the past five years, before being significantly hit by the COVID-19 pandemic. Even after a solid 20% gain this month, TD stock is still more than 6% down from its pre-COVID levels. This compares to the Bank of America’s 16% decline from pre-COVID levels, after a 22% gain in the past month.

As alluded to earlier, both TD and the Bank of America are solid dividend-paying companies. TD stock currently has a forward dividend yield of 4.46% and a 59.3% payout ratio. The company is the leading bank, among the Big Five, in terms of its dividend-growth potential. Since 2000, TD has been able to raise its dividend at a 10% annualized growth rate.

Foolish takeaway

Warren Buffett is one of the most famous investors of his time. Apple and Bank of America make up his two largest positions. Similarly, Canadians should consider Constellation Software and TD Bank as foundational positions within their portfolios. By doing so, Canadians gain exposure to a solid tech company that offers significant long-term growth potential and an excellent dividend-paying company. Adding companies such as these may be essential in achieving financial success.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jed Lloren owns shares of Apple. David Gardner owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Constellation Software and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares).

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