Warren Buffett, who needs no introduction, through Berkshire Hathaway (BRK.A)(BRK.B) owns a large portfolio primarily consisting of dividend stocks that compliments his collection of wholly-owned businesses (which are essentially private dividend payers themselves).
Although a legendary stock picker, Buffett now holds a portfolio that may seem obvious, uninteresting, and common among individual investors due to his company's massive size and the need to pick mostly large companies. Fortunately, boring doesn't mean unprofitable, as many of Buffett's holdings likely have a strong future even if they won't have market-shattering returns. What they lack in terms of quick money potential, they make up for in high risk-adjusted return potential, along with reduced taxes and reduced transaction fees from the long holding period that is normally appropriate for these sorts of companies. It's convenient that most of the picks of one of the world's best investors happen to be low-maintenance investments that are highly suitable for individual investors.
When presenting some of Buffett's top dividend holdings, one realizes that most of Buffett's selections are dividend-growth companies rather than top-yield companies. Some of his highest yield holdings, although worth billions in Berkshire's portfolio, tend to make up a fairly small portion of the portfolio. Many of his core holdings happen to be moderate-yielding long-term dividend growers.
Berkshire's two largest holdings, Coca Cola and Wells Fargo, are super large-cap companies that have fairly modest dividend yields, and his third largest holding, American Express, is excluded from this list due to its long-term yield of under 2%. That brings up to plate his fourth largest holding, Procter and Gamble. His fifth largest holding, Kraft, hasn't raised dividends recently, so is excluded. His sixth and seventh largest holdings, Johnson and Johnson and ConocoPhillips, round at the top five included here.
The Coca Cola Company (KO, Financial)
Coca Cola is Buffett's largest individual stock holding and one of his longest static holdings. It's important not to be misled by Coke's currently low valuation. Due to one-time charges the company has a low P/E but in reality is rather pricey. I published a fuller analysis of the company a few months ago. In summary, while Coca Cola may be trading for a premium as it always does, its huge international exposure, enormously wide moat, and consistent growth may provide shareholders with solid risk-adjusted returns over the next decade, and it is trading at a level that is rich although is not unreasonable.
The health concerns of Coca Cola's products are well known, but fortunately the company has been modestly shifting towards healthier products. Pepsico (PEP, Financial), however, has been spearheading the effort towards healthier products and also purchased their North American bottlers, a move that Coca Cola copied. But despite those successes of Pepsico, Coca Cola maintains dominant positions in many of its markets, and its 100% focus on beverages (including juices and teas rather than just sodas), gives the company a larger net profit margin.
Coca Cola is known for having a large international exposure, but there is still plenty of room to grow. Compared to the American annual per-capita consumption of nearly 400 Coca Cola servings across product lines, China, India, Pakistan, Nigeria and Indonesia, some of the world's most populated countries, each consume less than a tenth of that annual per-capita amount. Although I doubt that Coca Cola will ever reach the market penetration it has in the US, (or Mexico with a whopping 675 annual per-capita servings), basic math shows that even if Coca Cola only captures moderate market shares of these large population countries, their growth potential is meaningful.
Dividend Yield: 2.76%
Payout Ratio: 35%
Most Recent Dividend Increase: 6.8%
Total Debt/Equity: 0.75
Wells Fargo (WFC, Financial)
Wells Fargo is perhaps the most attractive big bank investment, being generally more conservative than the others. Still, the company has been part of this financial crisis and has an ongoing poor mortgage portfolio performance. The dividend is currently a bit under 2% but was included on this list due to its dominating presence as Buffett's second largest stock holding, and the fact that it has traditionally been a significant dividend investment and is beginning to regrow its previously cut dividend.
Wells Fargo utilizes its scale to cross-sell products to its customers. The business plan is to meet 100% of the financial needs of customers through banking, wealth management, insurance and other products. Wells Fargo has nearly $1.3 trillion in assets and serves 70 million customers with 9,000 locations. Nearly a quarter of the money deposited with Wells Fargo is non-interest paying, and their income is greatly diversified over a number of sources. The low-cost rate of deposits allows Wells Fargo to have a 4% net interest spread, which is commendable.
The bank still has large foreclosure and delinquency rates (although below market average) and is in the process of integrating Wachovia, which it acquired during the financial crisis. Still, analysts expect a 25% increase in EPS for 2012 compared to their estimates for 2011, and the low valuation and low payout ratio provide a lot of potential upside for the dividend as Wells Fargo continues to recover. Berkshire's already enormous position in Wells Fargo has been steadily increasing over the past several years.
Dividend Yield: 1.92%
Payout Ratio: 20%
Most Recent Dividend Increase: 70%
Equity/Assets: 10%
Procter and Gamble (PG, Financial)
Procter and Gamble pays a moderate dividend yield and has raised its dividend for more than fifty consecutive years. The company has the large scale and distribution network to provide itself with a solid competitive advantage, and spends more money on market research than any other company. Although the company is currently facing a difficult environment, the defensive nature of the business, and the fact that a significant portion of shareholder returns come from dividends and from net share repurchases that total even more than dividends provide elements of consistency. The products and business model are straightforward, the dividends provide increasing income streams, and share repurchases fuel EPS growth and dividend growth, as long as they are performed at reasonable prices.
With a decent balance sheet, substantial international exposure, five decades of consecutive dividend growth and an even longer total dividend history, mega-cap status, and enormous and consistent free cash flows, Procter and Gamble is understandably a common blue-chip core holding in dividend portfolios. Berkshire has been mildly reducing its PG holding, but the multi-billion dollar holding is still one of his largest.
Dividend Yield: 3.39%
Payout Ratio: 55%
Most Recent Dividend Increase: 9%
Total Debt/Equity: 0.50
Johnson and Johnson (JNJ, Financial)
Johnson and Johnson faced a substantial string of recalls throughout 2010 and is facing ongoing litigation, but the valuation for this health care giant is historically and arguably fundamentally low. JNJ is broken down into three business segments: Consumer Health, Pharmaceutical, and Medical Devices and Diagnostics, and each of these segments is among the largest businesses in its field. Furthermore, all three segments are extremely diversified, with both the Consumer Health and Medical Devices segments containing a huge array of products, and the Pharmaceutical segment containing seven drugs that each bring in over $1 billion in revenue.
Johnson and Johnson is one of the few companies to hold a perfect AAA credit rating, and the rock-solid balance sheet shows why. Total Debt/Equity is only 0.30, less than 30% of shareholder equity consists of goodwill, and the interest coverage ratio is over 30. In addition, JNJ pulls in huge free cash flows that typically exceed net income, which can easily pay for dividends and share repurchases. The litigation, quality control issues and slowing growth should be a concern, but the valuation can be compared with the quality to determine whether JNJ is a suitable investment.
Berkshire's portfolio contained a substantial amount of JNJ stock in 2007 and 2008, and this position was approximately cut in half during the 2009 market low, since JNJ is a defensive name and didn't dip as much as the broad market. Buffett ditched some JNJ shares to buy other names at lower bargains, but then substantially increased his JNJ position in 2010 to approximately 70% of his pre-financial crisis position, buying at around $60 a share.
Dividend Yield: 3.53%
Payout Ratio: 50%
Most Recent Dividend Increase: 5.5%
Total Debt/Equity: 0.30
ConocoPhillips (COP, Financial)
Buffett bought COP at the wrong time, when oil prices were high, but future returns are likely to be better. The company pays a larger dividend than either of its two bigger oil siblings, Exxon Mobil (XOM, Financial) and Chevron (CVX, Financial), although the balance sheet isn't quite as strong compared to those two. More interestingly, COP has announced plans to split into two separate entities: an upstream company and a downstream company. Investors would own both and according to the CEO, the upstream company, ConocoPhillips, would keep its current dividend, and the downstream company may pay a dividend as well, which would increase the total yield for investors.
COP has generated free cash flow every year of this decade, and has put that money to good use. In addition to paying off debt, the company is paying large dividends and putting even more cash towards net share repurchases than toward dividends, and since oil companies tend to trade for perpetually low valuations, COP is buying large chunks of its market cap back each year. The yield of return to shareholders, when taking into account both dividends and net share repurchases, is currently around 9% rather than only the roughly 4% dividend yield.
Buffett has been holding COP for a while but dramatically increased his position in 2008 just at the wrong time for the market crash and fall of energy prices. He has since reduced his position, but still holds over $2 billion worth of the company, and more than he did before 2008.
Dividend Yield: 3.91%
Payout Ratio: 35%
Most Recent Dividend Increase: 20%
Total Debt/Equity: 0.34
Full Disclosure: I own shares of KO, PG, JNJ, CVX, and XOM and have no position in COP, WFC, AXP, or PEP. You can see my portfolio of individual holdings here.
Although a legendary stock picker, Buffett now holds a portfolio that may seem obvious, uninteresting, and common among individual investors due to his company's massive size and the need to pick mostly large companies. Fortunately, boring doesn't mean unprofitable, as many of Buffett's holdings likely have a strong future even if they won't have market-shattering returns. What they lack in terms of quick money potential, they make up for in high risk-adjusted return potential, along with reduced taxes and reduced transaction fees from the long holding period that is normally appropriate for these sorts of companies. It's convenient that most of the picks of one of the world's best investors happen to be low-maintenance investments that are highly suitable for individual investors.
When presenting some of Buffett's top dividend holdings, one realizes that most of Buffett's selections are dividend-growth companies rather than top-yield companies. Some of his highest yield holdings, although worth billions in Berkshire's portfolio, tend to make up a fairly small portion of the portfolio. Many of his core holdings happen to be moderate-yielding long-term dividend growers.
Berkshire's two largest holdings, Coca Cola and Wells Fargo, are super large-cap companies that have fairly modest dividend yields, and his third largest holding, American Express, is excluded from this list due to its long-term yield of under 2%. That brings up to plate his fourth largest holding, Procter and Gamble. His fifth largest holding, Kraft, hasn't raised dividends recently, so is excluded. His sixth and seventh largest holdings, Johnson and Johnson and ConocoPhillips, round at the top five included here.
The Coca Cola Company (KO, Financial)
Coca Cola is Buffett's largest individual stock holding and one of his longest static holdings. It's important not to be misled by Coke's currently low valuation. Due to one-time charges the company has a low P/E but in reality is rather pricey. I published a fuller analysis of the company a few months ago. In summary, while Coca Cola may be trading for a premium as it always does, its huge international exposure, enormously wide moat, and consistent growth may provide shareholders with solid risk-adjusted returns over the next decade, and it is trading at a level that is rich although is not unreasonable.
The health concerns of Coca Cola's products are well known, but fortunately the company has been modestly shifting towards healthier products. Pepsico (PEP, Financial), however, has been spearheading the effort towards healthier products and also purchased their North American bottlers, a move that Coca Cola copied. But despite those successes of Pepsico, Coca Cola maintains dominant positions in many of its markets, and its 100% focus on beverages (including juices and teas rather than just sodas), gives the company a larger net profit margin.
Coca Cola is known for having a large international exposure, but there is still plenty of room to grow. Compared to the American annual per-capita consumption of nearly 400 Coca Cola servings across product lines, China, India, Pakistan, Nigeria and Indonesia, some of the world's most populated countries, each consume less than a tenth of that annual per-capita amount. Although I doubt that Coca Cola will ever reach the market penetration it has in the US, (or Mexico with a whopping 675 annual per-capita servings), basic math shows that even if Coca Cola only captures moderate market shares of these large population countries, their growth potential is meaningful.
Dividend Yield: 2.76%
Payout Ratio: 35%
Most Recent Dividend Increase: 6.8%
Total Debt/Equity: 0.75
Wells Fargo (WFC, Financial)
Wells Fargo is perhaps the most attractive big bank investment, being generally more conservative than the others. Still, the company has been part of this financial crisis and has an ongoing poor mortgage portfolio performance. The dividend is currently a bit under 2% but was included on this list due to its dominating presence as Buffett's second largest stock holding, and the fact that it has traditionally been a significant dividend investment and is beginning to regrow its previously cut dividend.
Wells Fargo utilizes its scale to cross-sell products to its customers. The business plan is to meet 100% of the financial needs of customers through banking, wealth management, insurance and other products. Wells Fargo has nearly $1.3 trillion in assets and serves 70 million customers with 9,000 locations. Nearly a quarter of the money deposited with Wells Fargo is non-interest paying, and their income is greatly diversified over a number of sources. The low-cost rate of deposits allows Wells Fargo to have a 4% net interest spread, which is commendable.
The bank still has large foreclosure and delinquency rates (although below market average) and is in the process of integrating Wachovia, which it acquired during the financial crisis. Still, analysts expect a 25% increase in EPS for 2012 compared to their estimates for 2011, and the low valuation and low payout ratio provide a lot of potential upside for the dividend as Wells Fargo continues to recover. Berkshire's already enormous position in Wells Fargo has been steadily increasing over the past several years.
Dividend Yield: 1.92%
Payout Ratio: 20%
Most Recent Dividend Increase: 70%
Equity/Assets: 10%
Procter and Gamble (PG, Financial)
Procter and Gamble pays a moderate dividend yield and has raised its dividend for more than fifty consecutive years. The company has the large scale and distribution network to provide itself with a solid competitive advantage, and spends more money on market research than any other company. Although the company is currently facing a difficult environment, the defensive nature of the business, and the fact that a significant portion of shareholder returns come from dividends and from net share repurchases that total even more than dividends provide elements of consistency. The products and business model are straightforward, the dividends provide increasing income streams, and share repurchases fuel EPS growth and dividend growth, as long as they are performed at reasonable prices.
With a decent balance sheet, substantial international exposure, five decades of consecutive dividend growth and an even longer total dividend history, mega-cap status, and enormous and consistent free cash flows, Procter and Gamble is understandably a common blue-chip core holding in dividend portfolios. Berkshire has been mildly reducing its PG holding, but the multi-billion dollar holding is still one of his largest.
Dividend Yield: 3.39%
Payout Ratio: 55%
Most Recent Dividend Increase: 9%
Total Debt/Equity: 0.50
Johnson and Johnson (JNJ, Financial)
Johnson and Johnson faced a substantial string of recalls throughout 2010 and is facing ongoing litigation, but the valuation for this health care giant is historically and arguably fundamentally low. JNJ is broken down into three business segments: Consumer Health, Pharmaceutical, and Medical Devices and Diagnostics, and each of these segments is among the largest businesses in its field. Furthermore, all three segments are extremely diversified, with both the Consumer Health and Medical Devices segments containing a huge array of products, and the Pharmaceutical segment containing seven drugs that each bring in over $1 billion in revenue.
Johnson and Johnson is one of the few companies to hold a perfect AAA credit rating, and the rock-solid balance sheet shows why. Total Debt/Equity is only 0.30, less than 30% of shareholder equity consists of goodwill, and the interest coverage ratio is over 30. In addition, JNJ pulls in huge free cash flows that typically exceed net income, which can easily pay for dividends and share repurchases. The litigation, quality control issues and slowing growth should be a concern, but the valuation can be compared with the quality to determine whether JNJ is a suitable investment.
Berkshire's portfolio contained a substantial amount of JNJ stock in 2007 and 2008, and this position was approximately cut in half during the 2009 market low, since JNJ is a defensive name and didn't dip as much as the broad market. Buffett ditched some JNJ shares to buy other names at lower bargains, but then substantially increased his JNJ position in 2010 to approximately 70% of his pre-financial crisis position, buying at around $60 a share.
Dividend Yield: 3.53%
Payout Ratio: 50%
Most Recent Dividend Increase: 5.5%
Total Debt/Equity: 0.30
ConocoPhillips (COP, Financial)
Buffett bought COP at the wrong time, when oil prices were high, but future returns are likely to be better. The company pays a larger dividend than either of its two bigger oil siblings, Exxon Mobil (XOM, Financial) and Chevron (CVX, Financial), although the balance sheet isn't quite as strong compared to those two. More interestingly, COP has announced plans to split into two separate entities: an upstream company and a downstream company. Investors would own both and according to the CEO, the upstream company, ConocoPhillips, would keep its current dividend, and the downstream company may pay a dividend as well, which would increase the total yield for investors.
COP has generated free cash flow every year of this decade, and has put that money to good use. In addition to paying off debt, the company is paying large dividends and putting even more cash towards net share repurchases than toward dividends, and since oil companies tend to trade for perpetually low valuations, COP is buying large chunks of its market cap back each year. The yield of return to shareholders, when taking into account both dividends and net share repurchases, is currently around 9% rather than only the roughly 4% dividend yield.
Buffett has been holding COP for a while but dramatically increased his position in 2008 just at the wrong time for the market crash and fall of energy prices. He has since reduced his position, but still holds over $2 billion worth of the company, and more than he did before 2008.
Dividend Yield: 3.91%
Payout Ratio: 35%
Most Recent Dividend Increase: 20%
Total Debt/Equity: 0.34
Full Disclosure: I own shares of KO, PG, JNJ, CVX, and XOM and have no position in COP, WFC, AXP, or PEP. You can see my portfolio of individual holdings here.
