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The Dividend Stocks of Donald Yacktman: NWSA, PEP, PG, MSFT, KO

Donald Yacktman founded Yacktman Asset Management in 1992, and the firm’s value-oriented approach has trounced the market ever since. Over the last decade its two funds, The Yacktman Fund and The Yacktman Focused Fund, returned 223% and 243%, respectively. The S&P 500 gained just 38% during the same period.

Mr. Yacktman, who now co-manages the funds with his son, Stephen, and Jason Subotky, has guided his firm to enormous returns not by hitting home runs on over-leveraged bets, but by making smart and timely investments in fantastic-but-underpriced businesses, limiting his downside risk and crushing the market when it falters.

Since 1999, the S&P 500 Index has had only four down years, and The Yacktman Fund has beaten it soundly each time — piling up double-digit gains in three of those years. Only once (the dreaded 2008) did the fund have a down year alongside the market, and even then it outperformed the S&P 500 by 11%.

Yacktman favors quality companies that churn out so much cash they’re able to adequately reinvest in operations and still have plenty leftover for smart acquisitions, share buybacks, and yes… dividends. He has said on many occasions, however, that it’s not the actual dividends he’s after, once telling Conseulo Mack: “We’re more concerned with the capacity to pay a dividend, rather than the dividend itself.” Whether dividends are a by-product of Yacktman’s stringent investment criteria or an understated requirement, there’s no denying The Yacktman Funds are filled to the brim with dividend-paying companies.

Consider: The firm is collecting dividends on 97% of its equity holdings. Each of its 17 largest equity positions pay dividends, as do 27 of its top 28 — with all but two of them currently yielding at least 2%. Of the 23 companies Yacktman has invested in this year, 22 pay a dividend, including his only new holding, Intel (INTC). And as a testament to his ability to identify companies that produce growing amounts of excess cash, each of the firm’s top 11 holdings has raised its payout since the start of 2010.

Yacktman Asset Management's Top Five Dividend Stocks: NWSA, PEP, PG, MSFT, KO

Given his investment philosophy, it’s no surprise that each of Yacktman’s top five holdings are blue chip companies pouring out cash, with much of it draining right into shareholders’ pockets. Here they are:

1. News Corporation (NWSA) is the firm’s largest holding overall. As you might expect, the media conglomerate produces plenty of cash and deploys it wisely, although its acquisitor extraordinaire Rupert Murdoch is much more inclined to use it for big acquisitions than direct shareholder returns.

Yacktman’s position in News Corp. isn’t just his largest, but one of his fastest growing. The firm purchased more than 12 million shares during the first three months of the year, bringing its total position to an all-time high of 58.4 million shares.

Shares of NWSA currently trade for $16.38, where they feature a 0.92% dividend yield. The company last gave shareholders a raise in February 2010, when it bumped its payout by 25%.

News Corp.’s paltry yield is by far the worst among Yacktman’s top ten holdings, but because the firm’s cost basis is just $12.77 — a 22% discount to the stock’s current price — its position in News Corp. actually carries a 1.17% yield-on-cost.

2. PepsiCo (PEP) is Yacktman’s second-largest holding, and it’s another stock he continues to plow cash into despite an already huge position. The firm purchased 5.2 million shares during the first quarter of 2011, bringing its total to an all-time high of 14.7 million. After spending parts of 2007, 2008 and 2009 gradually trimming his position, Yacktman has added PepsiCo shares in each of the last eight quarters.

Shares of PEP currently trade for $68.69, where they carry a 3.00% dividend yield. The global food giant increased its dividend by 7% in May, giving its shareholders a raise for the 39th consecutive year.

Yacktman’s shares have cost an average of just $63.19, or 8% less than the stock’s current price. As a result, his fund’s position carries a 3.26% yield-on-cost.

3. The Procter & Gamble Company (PG) is the firm’s third largest holding, and it’s rising up the ranks quickly thanks to some aggressive buying to start the year. Yacktman added 4.3 million shares during the first quarter, increasing his stake by 85% and pushing P&G up from the No. 5 position it held at the end of 2010.

Shares of PG currently trade for $64.70, where they feature a 3.25% dividend yield. The company raised its dividend by 9% in April, marking the 55th consecutive year the consumer goods behemoth has given it shareholders a raise. Only four publicly-traded companies currently have longer dividend growth streaks than Procter & Gamble.

Because Yacktman’s cost basis sits at just $61.72, his fund’s position in P&G carries a 3.40% yield-on-cost.

4. Microsoft Corporation (MSFT) is a stock Yacktman has been buying for years, but never at the rate he did in the first quarter. Despite already owning an all-time high of 12.9 million shares coming into the year, his firm spent the first three months of 2011 purchasing an additional 8.5 million shares.

Shares of MSFT are currently trading at $23.70, where they carry a 2.70% dividend yield. Microsoft initiated its quarterly payout in 2004, and has raised its annual dividend total by at least 10% every year since, doubling its payout in the process. Many have called for Microsoft to be even more aggressive with its dividend hikes, and with a forward payout ratio under 25%, the company could certainly afford to do so.

But the software giant holds most of its cash overseas, and repatriating the funds for dividend purposes would result in a hefty tax bill. Instead, management has been using its international cash for more tax-favorable (but arguably less shareholder-friendly) transactions like buying Skype, which could be purchased without repatriation (since it’s headquartered in Luxembourg).

Yacktman’s 21.4 million shares of Microsoft were purchased at an average price of $26.30, or an 11% premium to the stock’s current level. That gives the firm a yield-on-cost of just 2.43%.

5. The Coca-Cola Company (KO) is the only holding in the firm’s top five that actually shrunk last quarter, albeit not by much. Yacktman sold about 1.8% of his 6.8 million shares during the first three months of the year.

Shares of KO currently trade for $65.39, where they feature a 2.88% dividend yield. The beverage giant increased its payout by 7% in February. While the move did extend its streak to 49 consecutive years of dividend growth, it was the smallest raise given to Coke shareholders since 2001.

After last quarter’s mini-selloff, Yacktman’s sitting on 6.7 million shares purchased for an average of just $52.73. His cost basis is 19% lower than the current share price, giving his firm an outstanding 3.57% yield-on-cost.

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All portfolio statistics are current as of The Yacktman Funds’ latest SEC filing, for the quarter ended March 31, 2011. Cost basis and average purchase price figures are estimates provided by GuruFocus. All share prices are current as of the market’s close on Friday, June 10, 2011.

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