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When Buffett approves a stock for Berkshire Hathaway’s (NYSE: BRK.b) portfolio, the odds overwhelmingly favor a dividend payer.
Indeed, Berkshire’s top-10 stock holdings are all dividends payers. What’s more, they pay a lot of them. Berkshire receives $3.8 billion (the equivalent of Sierra Leone’s GDP) annually in dividends from these 10 stocks alone.
The amount these stocks pay will grow this year and every year thereafter. All but one is a dividend grower.
A dividend-growth strategy usually demands entering with a lower dividend yield – typically 2% or 3%.
A high-yield strategy enables you to start with high yield, typically 7% or 8%. But it ends there. Most high-yield stocks pay a flat dividend year after year.
With typical Buffett ingenuity, the two strategies were combined in one traditional high-yield stock that’s also a nontraditional dividend-grower.
STORE Capital (NYSE: STOR) is a real estate investment trust (REIT). It is one of the largest and fastest-growing REITs
STORE owns a diversified portfolio composed of 2,334 properties. Management has grown the property count 33% over the past two years.
The portfolio has grown. The dividend has kept pace.
STORE paid its first quarterly dividend in Jan. 2015. It paid $0.114 per share. The most recent quarterly dividend was paid in July 2019. Investors received $0.33 per share.
STORE’s success appears improbable at first glance. Its portfolio bulges with brick-and-mortar retail locations.
E-commerce retail, led by Amazon.com (NASDAQ: AMZN), is the harrowing threat if you’re unsure how to play the game. STORE knows how to play the game.
The largest percentage – 81% – of its real estate portfolio is dedicated to retail where e-commerce competitions is neigh impossible. These include restaurants, childhood education, health clubs, pet care, movie theaters, and family entertainment destinations.
Another 9% is dedicated to manufacturing: metal fabrication, furniture manufacturing, and the like. There’s no getting around physics. Manufacturing requires a physical location.
The remaining 10% could be considered vulnerable to Amazon et al, but even here, customers prefer to touch before they buy. These properties are occupied by furniture stores, farm supply centers, hunting and outdoor outfitters.
Intelligent growth is manifest in management’s dedication to keep cash flow rising. If you’re a growing REIT, you’d best grow to support dividend growth.
Funds from operations (FFO) is the key metric. FFO is the cash flow that supports the dividend. As FFO goes, so goes the dividend.
Despite paying more FFO to support the dividend, the dividend remains well-covered. STORE’s FFO payout ratio holds steady at 71% – the lowest percentage payout ratio among its peers.
As is so often the case, Buffett’s timing was impeccable. His commitment was unequivocal.
Buffett bought 18.6 million STORE shares for Berkshire’s account in early 2017.
Buffett was able to lock in a 5.6% starting dividend yield on his cost basis. The yield on his cost basis has increased to 5.9% over the past two years.
The yield will increase again this year. STORE raises the dividend with the fourth-quarter payment.
New investors are unable to secure a bargain on Buffett’s terms, but they can still lock in a respectable 3.8% starting yield. The yield is all but guaranteed to exceed 4% within the next three months.
Keep in mind that share-price nearly always accompanies dividend growth. STORE shares are up 53% since Buffett’s purchase.
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Warren Buffett and dividends.