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All Contents © 2019The Kiplinger Washington Editors
By Brian Bollinger, Simply Safe Dividends
| June 15, 2017
Warren Buffett, CEO of Berkshire Hathaway Inc. (BRK.B), is regarded as one of best practitioners of value investing. His investment philosophy is to invest in companies that have a safe and regular stream of cash flows — many of them are long-paying dividend stocks — and a strong competitive moat.
Most of Buffett’s famous stock investments are companies which have a solid franchise and have maintained their competitive advantages over many decades. A number of his holdings are therefore among the best high-dividend payers for retirement income.
And while an investment from Buffett isn’t necessarily a guarantee of success, having his seal of approval, at the very least, typically says something about a stock’s inherent value and quality.
Today, we’re going to look at seven Warren Buffett dividend stocks that are perfect for retirement accounts. That’s because of the wide moats of their businesses, strong fiscal management and average- to above-average dividend yields — which should only grow over time.
In no particular order, here they are.
Prices and data are from the original InvestorPlace story published on June 9, 2017. Click on ticker-symbol links in each slide for current prices and more.
Headquartered in Houston and incorporated in 2011, Phillips 66 (PSX) is a multinational diversified energy company engaged in oil refining and marketing activities. The company processes, transports, stores and markets fuels and other products globally.
And Warren Buffett has more than $6 billion invested in the company, good for a 15.55% stake.
Phillips 66 is a downstream business spinoff of ConocoPhillips (COP), which was the third-biggest oil company in America.
Phillips 66 operates in every segment of the crude oil, natural gas and natural gas liquids value chains, which positions it favourably to capture many different growth opportunities. A global customer base, extensive network of pipelines, diversified asset portfolio and a disciplined capital allocation approach are the company’s major competitive advantages.
PSX is committed to doling out a regular dividend and has increased its payouts at a 14.3% annual rate over the past three years. The company last increased its dividend by 11% in 2017.
Phillips 66’s payout ratio is high at approximately 80%, but its cash flow generation has remained strong over the past six years since Phillips 66’s formation. Phillips 66 is aiming for a 60/40 split between reinvestment and distributions going forward, which should continue to support a growing payout.
General Motors Company (GM) is a global automotive company serving customers across six continents. The company has leadership positions in many of the world’s largest and fastest-growing automotive markets. The company designs, builds and sells cars, trucks and automobile parts worldwide.
GM offers a complete range of vehicles stretching from electric cars to heavy-duty full-size trucks. General Motors owns some of the world’s best known automobile brands such as Chevrolet, Buick, GMC and Cadillac — but it sold its European brands, Opel and Vauxhall, to Peugeot this year.
General Motors has a vast and growing global presence. The company delivered 10 million vehicles in 2016. It is expanding its reach in the world’s most populous country China by opening five new manufacturing plants.
An impressive range of cars, a global customer base, massive scale, and 100 years of experience in the auto industry form somewhat of a moat around General Motors, although the industry is very price-competitive and cyclical. The company also has an impressive and broad line-up of new launches coming up over the next few years and expects its adjacent businesses to contribute around $2 billion to pretax profit in 2019.
General Motors returned $4.8 billion to shareholders through dividends and share repurchases in 2016 and increased its dividend by roughly 6% in the same year.
Though the company has not given a definite EPS outlook for 2017, it at least expects to grow earnings further in 2017. Given a very low payout ratio below 30% and plenty of cash on the balance sheet, management could raise the dividend again soon.
The Coca-Cola Co (KO) is a leading beverages company providing both sparkling and still beverage globally. With a massive global market share, it is the largest multinational beverage company in the world.
Coca-Cola has a large product portfolio consisting of over 3,000 beverages and more than 500 brands. It’s not just Coke, Diet Coke and Sprite — there’s also Minute Maid juices and Dasani bottled water.
KO has continually evolved, keeping in mind changing consumer tastes and buying habits. With increasing health awareness, about one-third of Coca-Cola’s product portfolio is now zero- to low-calorie. The company is suitably positioned to tap into rising consumer trends in the emerging markets as well.
A globally recognized brand, massive customer base, large global distribution channels, and popular brands are Coca-Cola’s biggest strengths. Going forward, the company is focusing on a leaner enterprise model that will result in an even more consumer-centric portfolio.
Coca-Cola has been paying dividends for almost a century now and has increased them for 55 consecutive years, making the company part of the exclusive dividend kings list here. It has clocked an impressive 9% dividend CAGR over the past two decades.
It does have a high payout ratio, however, and 2017 revenues are expected to grow by 3%. So expect KO dividends to grow in the low- to mid-single-digit level.
General Electric Company (GE) is a leading multinational industrial conglomerate. The company provides products and services for a wide range of industries like aviation, power, oil and gas, renewable energy, healthcare, transportation and lighting — though that’s moving all the time.
For instance, the company is expected to spin off the combined energy business upon a successful merger with Baker Hughes Incorporated (BHI) — it received EU approval yesterday — and the company is also in talks to sell the GE Lighting business.
For now, though, GE is a global industrial giant employing over 295,000 people and serving customers in about 180 countries. Since its foundation in 1892, the company has been transforming and adapting to changing needs of time through new technologies and innovations.
GE’s diversified product offering across numerous industries safeguards it from downturns in any particular region or sector. Moreover, the company has a presence in industries that are indispensable for the modern world and are destined to grow in future. All these factors — including its substantial aftermarket services business — have created a strong competitive moat around General Electric.
GE has almost doubled the overall contribution from its industrial portfolio to 90% of profits over the past decade. In the past year, GE sold most of its capital assets, integrated Alstom (its largest industrial acquisition) and announced the aforementioned plans to merge with Baker Hughes.
General Electric pays out roughly 60% of its income as dividends, and it has increased its dividend at an 8.8% CAGR over the last five years. GE has projected to return $20 billion to shareholders in dividends and buybacks. Investors can expect dividends to increase in the low-to-mid single digit range.
Wells Fargo & Co. (WFC) is a diversified financial services company that provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,600 locations.
And while Wells Fargo suffered significantly in 2016 and 2017 — and even in good times, underperformed its peers — on account of the fake account scandal, it is now working aggressively to rebuild the customer trust.
Starting in 1852 as a regional bank, WFC today serves the financial needs of one in every three U.S. households. Wells Fargo has $1.9 trillion in assets and offices in 42 countries. The company ranked third in assets among U.S. banks at the end of the fourth quarter and was most valuable banking brand in North America and retail banking (2017).
A large and loyal customer base, diversified and balanced revenue structure, leading market share in key financial products, a large national distribution network, and a cheap base of deposits are the company’s biggest strengths.
Wells Fargo has a low payout ratio near 40% and an impressive dividend CAGR of 25.8% over the past five years. WFC also expects to pay 55%-75% of its profits in the form of dividends and share repurchases. Hence, shareholders could expect dividends to increase in the low single digit range.
Kraft Heinz Co (KHC) is one of the largest food and beverage companies in the world. It’s engaged in manufacturing of sauces, cheese, meals, meats, refreshment beverages, coffee and other grocery products.
The company was formed in July 2015 by the merger of Kraft Foods and a subsidiary of H.J. Heinz. The Kraft Heinz Co is now the third-largest food and beverage company in North America and the fifth-largest in the world.
Condiments and sauces are Kraft Heinz’s largest product category, accounting for 26% of 2016 revenue. Other products that contributed 10% or more to total sales were cheese and dairy (21%), ambient meals (9%), frozen and chilled meals (8%), meats and seafoods (10%).
The Kraft Heinz Company has an unparalleled portfolio of more than 200 iconic brands like Kraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid etc. The company has production facilities in more than 40 countries and a vast distribution network stretching across 190 countries.
KHC has successfully built a reputation of a trusted producer of foods that is known for quality, taste and nutrition. The company invests considerably in R&D and also owns numerous patents and intellectual properties both in the U.S. and internationally. All these serve as entry barriers for new players. Moreover, the business is also subject to rigorous food and environmental regulations.
Kraft Heinz last raised its dividend by 4.3%. With earnings likely to grow by 3% to 5% over the next few years, investors can expect dividends to increase in the low-single-digit range.
United Parcel Service, Inc. (UPS) is the world’s largest package delivery company and one of the leading global providers of transportation and logistics services.
I should note that this is one of Berkshire’s smallest holdings, though he has held on to UPS since 2007.
UPS has a well-established global delivery system serving every address in North America and Europe and more than 220 countries worldwide. The company delivered more than 4.9 billion packages in the last year alone. However, the company also is planning major transformations in its transportation and operations network, which should enable it to become more efficient and provide better customer service. It is investing in the next-generation smart logistics network, automation and deepening capabilities in the emerging markets.
United Parcel Service also is investing in new technologies and solutions such as additive manufacturing (3D printing), network optimization tools, autonomous vehicles and advanced product tracking functionality.
UPS has a long history of growing dividends, increasing them at an 8.4% CAGR over the last five years, and has a reasonable payout ratio of 56%. UPS generates strong cash from operations and has a generous shareholder distribution policy.
The company expects 2017 adjusted diluted EPS to increase by 5% to 10% as a part of its 2018-2019 long-term financial targets. The company is also planning $1-$1.8 billion in annual share repurchases. Investors can therefore expect dividend increases in the mid-single-digit range.
UPS also is a holding in Bill Gates’ dividend portfolio here.
This article is from Brian Bollinger of InvestorPlace. As of this writing, Brian Bollinger was long GE, GM, JNJ, PG, VZ and WFC.
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