Blue chip dividend stocks are known for their regular and growing dividends. But most don’t deliver the high yields that are desired by most retirees.
Just consider the most blue chip of all stocks: Exxon Mobil (NYSE: XOM). The company pays a healthy 3.3% dividend yield. But you’d need to have $1 million invested in blue chips like this to pull in just $33,000 per year of investment income.
If you’re like most income investors, you need to earn more income. I’m going to show you how Warren Buffett is earning a 7% yield from a well-known blue chip dividend stock. That company is Kraft Foods (NYSE: KRFT).
You probably heard today’s big news. H.J. Heinz (private) will be merging with Kraft Foods. The combined company will be the third largest food company in the U.S., with a diverse group of billion-dollar brands.
A couple years ago, Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) and Brazilian private equity firm 3G Capital Partners took Heinz private. With this merger, Heinz will become public once again by merging with Kraft. The combined company will simply be known as Kraft Heinz.
Heinz has been a pretty typical private equity transaction. Berkshire fronted the cash and financing expertise. Meanwhile, 3G Capital aggressively cut expenses and boosted profits at Heinz. Their efforts have helped boost the company’s EBITDA margins by 44% less than two years.
Once the deal closes, Berkshire Hathaway will have invested $9.5 billion for its equity stake of 320 million shares. That translates into a cost basis of just under $30 for each share of Kraft Heinz.
After rising 36% yesterday, Kraft stock closed yesterday’s session at $83. Existing Kraft shareholders will receive a special one-time $16.50 dividend when the transaction closes. After the ex-dividend date, Kraft shares will likely fall by the amount of the special dividend.
Excluding the value of the special dividend, Kraft shares are trading at roughly $66.50.
Kraft currently pays a regular dividend of $2.20. That translates into a 3.3% dividend yield. Compared with other blue chip dividend stocks, this is considered pretty normal.
But Warren Buffett and Berkshire Hathaway will be collecting a far higher yield. In fact, Berkshire will pocket just over $700 million in annual dividends from Kraft Heinz.
Compare the $700 million in dividends with the $9.5 billion Berkshire investment, and you’ll quickly realize that the yield is far higher. In fact, Berkshire can expect to start collecting a 7.4% dividend yield from Kraft Heinz.
This may in fact be conservative. I’m assuming that the dividend simply remains at this level. However, it’s quite likely that Kraft Heinz will increase its dividend in the coming years as the profits grow. Every $0.30 dividend increase will raise Berkshire’s yield by 1%.
The simple lesson for every investor is to focus on cost basis yield. By this measure, you calculate your dividends based upon your cost of the stock … not the recent share price.
Warren Buffett’s secret to collecting high yields from blue chip dividend stocks is simple: invest in value stocks and wait for them to increase their dividend.
In the case of Heinz, the company didn’t look inexpensive when he invested in 2013. At the time, the stock traded at 20 times earnings.
Yet after 3G Capital did its magic, the profits soared. Two years later, it’s clear that H.J. Heinz was a bargain when Berkshire and 3G invested. Today, Heinz is able to cash in on its higher valuation and acquire a huge stake in Kraft.
Of course, investors like us aren’t presented with opportunities to invest in private equity deals. But the same strategies can be applied.
You should set your sights on stocks with the following attributes:
- Reasonable valuation
- Profits growing at a faster pace than sales
- Dividend yield of at least 2%
- History of growing dividend payments
- Management focused on delivering value
If you focus your investments on stocks like this, you’ll be handsomely rewarded. You might not start collecting a 7.4% dividend yield in just two years. But you’ll see your blue chip dividends grow year after year. If you wait five or 10 years, you’ll likely be sitting on healthy capital gains and a high yield.
Are you ready to learn more about two high-yield stocks that Warren Buffett is buying? These stocks provide investors with current dividend yields of 6.2% and 9%. With dividend payments increasing, you can expect those dividend yields to rise in the coming years. Just click here for all the details.
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