5 Warren Buffett Dividend Stocks to Consider in August 2017
Warren Buffett Dividend Stocks to Consider in 2017
Warren Buffett is known as the most successful investor of all time through his holding company Berkshire Hathaway Inc. (NYSE:BRK.B). Buffett is also known as one of the wealthiest people in the world, and he got that way from the decisions he has made by investing in public companies. It is no wonder that investors from all over the world want to know what Mr. Buffett owns.
Investors always want to know the secret formula for picking the right stocks and the ones to stay away from. Buffett is known for keeping things simple and picking stocks with a growth-oriented profile, strong return of capital to investments, competitive advantage, great operators, and geographic reach. Simply put, Buffett looks to own companies that are simple to understand and have a strong business model.
With the great success of Buffett, today’s focus will be on the best Warren Buffett dividend stocks for 2017. Below is a list below of five companies owned by Warren Buffett that pay out a dividend to investors. All of the companies listed below operate in different segments of the market, so there is no overlap. Further below are the reasons why Buffett owns the shares, and why investors might want to consider owning them too.
List of Warren Buffett Dividend Stocks to Consider in August 2017
|Sr.No||Company Name||Stock Symbol||Industry|
|1||Apple Inc.||AAPL||Technology Hardware & Equipment|
|2||Mastercard Inc||MA||Software & Services|
|3||Wal-Mart Stores Inc||WMT||Food & Staples Retailing|
|4||General Motors Company||GM||Automobiles & Components|
|5||Johnson & Johnson||JNJ||Pharmaceuticals, Biotechnology & Life Sciences|
#1 Apple Inc.
Apple Inc. (NASDAQ:AAPL) represents the No. 3 top holding within Berkshire Hathaway. Yes, Apple is a technology company, and Buffett has always shied away from this sector because he doesn’t understand the business models. However, AAPL stock meets all of the investment criteria that Buffett follows, which is great management, a steady stream of revenue, and a strong balance sheet. Most importantly, it has an easy-to-understand business model.
Buffett tends to favor investments that have a “stickiness” aspect, in which the end user returns to the company to spend more money. The “iPhone” is the largest contributor to the revenue line, which is north of 50% of total revenue. With Apple, there is initially a phone sold to the end user, which is just the beginning.
After the initial purchase, there are additional services that the user purchases, including warranties, applications, music, and movies. Today, it is quite difficult to live without a cell phone, which creates the need for the phone as an essential product. Over time, the user of the services will upgrade his/her current phone device, which restarts the cycle for recurring revenue. (Source: “Q3 2017 Unaudited Summary Data,” Apple Inc., August 1, 2017.)
Even though Apple is a technology company, it’s hard to tell by the company’s history. AAPL is a rare company because it operates in the technology sector and pays a dividend. Currently, the dividend is paid on a quarterly basis and amounts to $0.63 per share. The management team reviews the dividend policy annually to see if the revenue allows the company to afford a higher payment, which happens to be the case. Therefore, AAPL stock is known as a dividend growth stock. This action of continuing to reward shareholders supports the thesis of a strong balance sheet and strong internal management within the company.
Further, AAPL is continuing to repurchase its shares, which helps Buffett own a larger piece of the company without any action. If you owned the shares as well, you too would benefit from this. Presently, there is a $210.0-billion share repurchase program in place. This is how it benefits Buffett and other Apple investors: AAPL continuously repurchases its own shares using the $210.0 billion. The result is that there are fewer shares available on the market for investors to trade. Therefore, each share in the hands of a shareholder is worth a higher percentage of ownership of the company. Over time, this results in Buffett’s net worth growing. This is why Buffett loves the company and why it is the No. 3 holding within his investment portfolio. (Source: “Apple Expands Capital Return Program to $200 Billion,” Apple Inc., May 2, 2017.)
#2 Mastercard Inc
Mastercard Inc (NYSE:MA) is another company owned by Warren Buffett that is paying a dividend this month. The payment in August is only one of four payments that are made to investors throughout the year.
Mastercard is one Berkshire Hathaway stock to consider in August 2017 for a few reasons. First off, Mastercard operates in an oligopoly environment. This protects the market share owned in the financial technology sector and keeps revenue steady and growing over time. This is because there are only a handful of companies that are in direct competition with MA. It’s unlikely that a new company starts operating in the sector, because there are high barriers to entry. MA operates all over the world, which adds to the diversification benefit as an investor.
Another reason to consider owning MA stock is the many partnerships it has around the world. These include financial institutions, merchants, governments, and businesses. For instance, financial institutions will look to Mastercard to help their customers make electronic payments and use the credit card technology for everyday purchases. The financial institutions use the technology of Mastercard and take on the financial risk themselves. Mastercard receives a licensing fee when a transaction is processed.
The last reason I’ll mention for considering MA stock is its growing dividend. Since 2014, the dividend on a per-share basis has doubled. The current streak of dividend growth is five years and can continue well into the future. Only about $0.21 from each dollar of earnings is paid to investors. The remaining $0.79 is kept within the company to be used for business growth. This, over time, should result in seeing a higher revenue number being reported and more money in investors’ pockets.
#3 Wal-Mart Stores Inc
At first, you may be asking yourself why Warren Buffett would own Wal-Mart Stores Inc (NYSE:WMT) stock. The majority of WMT revenue comes from the brick-and-mortar retail business, but e-commerce is the future. Why isn’t there an ownership stake in Amazon.com, Inc. (NASDAQ:AMZN) over WMT stock, if e-commerce is the future of retail?
To answer this question, it comes down two numbers: the size of the company and the revenue that is accounted for. Amazon is a company with a market cap of approximately $474.0 billion with sales numbers of $136.0 billion annually. WMT stock, on the other hand, has a market cap of about $243.0 billion and revenue of $485.0 billion annually. Based on this, there is more value in WMT stock and more potential to invest in other areas of the retail segment.
For instance, one recent acquisition that has been made in June 2017 is the agreement to bring Bonobos, Inc. into Wal-Mart’s ecosystem. Bonobos is an e-commerce business that designs and sells men’s apparel. There are many deals that Bonobos already has in place, including with luxury retailer Nordstrom, Inc. (NYSE:JWN). WMT is known as a brand that offers consumers value. However, with this acquisition, it opens the door to the luxury segment of retailing and having more exposure to the e-commerce segment. (Source: “Walmart to Acquire Bonobos and Appoint Andy Dunn to Oversee Exclusive Consumer Brands Offered Online,” Wal-Mart Stores Inc, June 16, 2017.)
Another recent move by Wal-Mart was the purchase of Jet.com, Inc. in September 2016.This again was a purchase of an online retailer that sells everyday items such as groceries, health and beauty products, household supplies, and pet supplies. This move should help complement the brick-and-mortar business, cross-selling products and brands to the end consumer. (Source: “Walmart Completes Acquisition of Jet.com, Inc.,” Wal-Mart Stores Inc, September 19, 2016.)
Also, WMT stock rewards shareholders with a growing dividend, which has seen an annual hike for the past 42 years. AMZN stock, on the other hand, does not pay out a dividend to its investors.
Even though AMZN stock is operating a 100% e-commerce business, which is the future of retailing, the numbers don’t lie. WMT is still generating 3.5 times more revenue than AMZN and it has the opportunity to retain its current market share and expand through acquisitions.
#4 General Motors Company
General Motors Company (NYSE:GM) is one of Warren Buffett’s largest positions in his Berkshire Hathaway investment portfolio. There are three reasons why Buffett owns GM stock, and investors may want to consider these in their own decision-making.
Even though GM is an American company, it has presence around the world. The one country that is contributing to the top and bottom lines as time passes is China. In July, China set another sales record, 287,581 cars, which was an increase of 6.3% compared to the previous year. The SUV division alone saw growth of 50% year-over-year, and those vehicles generate a higher profit margin than compact cars. The vehicle with the highest sales growth in China compared to the previous year was the “Cadillac CT6,” which saw deliveries increase by 181%. There is a lot more growth to look forward to in China, with the momentum just beginning and more vehicles being introduced to the markets. (Source: “GM Delivers July Record 287,581 Vehicles in China,” General Motors Company, August 3, 2017.)
The China sales growth adds to the global diversification, which makes shareholders the real beneficiaries. With this type of growth, the management team is able to reward shareholders with a growing dividend. Since 2013, the dividend on a per-share basis has increased 26%. This means that, without needing to sell any shares, investors receive a larger portion of capital. Also, a higher dividend yield would be received based upon the average purchase price over time.
Another form of returning capital to shareholders that GM uses is share repurchases. This is a tax-efficient method of giving back money to shareholders, since there are no tax liabilities to investors until the shares are sold. This also shows the markets that the management team believes that the markets are not correctly valuing the company and that the stock should be trading at a higher price. There is evidence of this in the valuation of GM stock.
The price-to-earnings (P/E) ratio takes the current stock price and divides it by the annual earnings of the company. When the P/E ratio for a company is lower than its industry peer group average, value is found in the stock. This happens to be the case for GM stock, which has a P/E ratio of 5.6 times compared to the industry average of 10.3 times. With growth numbers seen in the double- and triple- digits from China, it’s quite possible that this is a key driver that moves the valuation higher. However, nothing happens overnight. Until then, the dividend and shares being repurchased could help the bottom line.
#5 Johnson & Johnson
Johnson & Johnson (NYSE:JNJ) is a company that has been operating for more than 100 years. JNJ has come a long way, and today it is known as one of the largest companies listed on a major U.S. trading exchange.
JNJ stock is engaged in the research, development, manufacture, and sale of a wide range of products in the healthcare sector. The company is divided into three segments: “consumer division,” “pharmaceutical,” and “medical devices.” The consumer segment includes products such as baby care, oral care, skin care, and wound care products. The pharmaceutical division is focused on creating products and services in areas including cardiovascular, metabolic diseases, and infectious diseases. The medical device segment includes products used for treating vision care, diabetes care, and orthopedic products.
Why should JNJ stock be considered a dividend stock to invest in? And why is JNJ one of many Warren Buffett companies to look for in 2017? Both of these questions will be answered next.
Warren Buffett is always looking to invest in growth companies. To determine if a company is a growth company, the return of equity (ROE) must be looked at. This ratio is calculated by taking the net income and dividing it by the shareholders’ invested capital. When the result is a number greater than 15%, the company would be classified as a growth company. In the case of JNJ stock, the ROE is presently 22%. Such a value is rare to see in a company that has a 100-year history and is one of the largest in the country.
Another reason why Buffett has exposure to this name, and why investors would want to consider owning JNJ, is the company’s heavy focus on returning more capital each year to shareholders. This is based on both the past and the present; there has been a growing dividend paid to investors since 1963. The current streak of dividend growth has been 54 years; this gives JNJ stock the title of both being a “dividend king” and a “dividend aristocrat” stock. A dividend king is a stock that has grown its dividend for 50 straight years. A dividend aristocrat stock is one that has increased its dividend for at least 25 straight years and is also one of the 500 companies listed on a U.S. trading exchange.
JNJ’s streak of dividend growth can continue well into the future because the management team ensures that about half of the company’s earnings are paid as dividends, and the remaining funds are retained for more growth. This shows that JNJ is managed with a great deal of financial discipline.