We can’t all be like Warren Buffett of Berkshire Hathaway (NYSE: BRK-A), but it can be instructive to see what stocks he holds. The rationale behind his purchases won’t even apply, because he has likely purchased those positions at times different than we would.
However, we should take a look at the dividend stocks he holds to determine if they might have a place in a long-term diversified portfolio. So let’s look at the top five dividend-paying stocks to see if they might make for good candidates.
Verizon Communications (NYSE: VZ) is the top position, and it pays a nice dividend of 4.4%. If you, as an investor, are considering buying Verizon, you should consider that it is operating in a highly competitive, highly commoditized industry. The telecom services it provides are really not much different from any other company’s.
Consequently, you should expect very little in the way of organic EPS growth going forward. Indeed, analysts only project 6% annualized growth from here. Add in the yield, and you get a 10.4% growth rate. Assigning a premium of 10% for its cash flow might boost a reasonable price for the stock to 11.5x FY15 earnings, which at $3.84 per share, gives you a fair value of about $42.
With the stock at $49, it’s a bit pricey, but its free cash flow means you are paying just slightly over fair value for that dividend.
General Motors (NYSE: GM) pays 4.1%. As the economy improved, the car and truck sector really took off. Things have been booming at virtually every car maker and car dealership. I’ve never been fond of the quality of GM cars, but there’s no doubting their popularity.
Say what you want about the bailout, but GM now sports $54 billion in cash, and $32 billion in debt. It makes money, although net income has been declining year over year. Free cash flow was $3 billion last year, although it paid $3.1 billion in dividends.
I think you may not see stellar returns from GM, but decent enough to justify a small position if you like the dividend.
National Oilwell Varco (NYSE: NOV) pays a 3.5% yield. Unlike many other energy plays, Varco has a very good balance sheet with $3 billion in cash and only $4 billion in debt. Even in a year where oil prices crashed, it still generated $2 billion in free cash flow, almost three times what was needed to pay that dividend.
Varco is in the oil services sector, so it deals with all the equipment and components needed for drilling and production. As those sectors struggle, Varco’s earnings will fall. The stock is well off its highs, but is very likely to survive this downturn. It may be worth buying as a value play.
The legendary Coca-Cola (NYSE: KO) comes in third place, with a 3.1% yield. Coca-Cola has been struggling the past few years. The beverage business is highly competitive, and there’s been a move away from soda into more health-conscious things like water.
I think Coca-Cola has to reinvent itself. It has a very strong position, with $35 billion in cash and $19 billion in debt. It produces very consistent free cash flow of some $8 billion every year, and pays out about 65% of that as a dividend.
But until Coca-Cola unveils a new vision for the future, I think you are overpaying at $45 for a company with next to no organic growth.
Suncor Energy (NYSE: XU) is in a similar position as Varco. It focuses on developing petroleum resource basins in Canada, produces and sells crude oil and natural gas, and various ancillary operations.
Its balance sheet is not quite as strong as Varco’s, with over $4 billion in cash and $10 billion in debt. It also struggles a bit more with free cash flow, which was only $1.7 billion last year, down from $3.15 billion the year before. That’s still plenty to pay the $1.29 billion in dividends. I think between these two, I go with Varco.
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