Wide-Moat Stocks Buffett Could Love, With Big Dividend Yields
As explained in an earlier YChart post, investing in wide-moat companies that have built up a big and defensible competitive advantage -- think Coca-Cola (KO), Google (GOOG), Starbucks (SBUX) -- has paid princely sums .The annualized return of the Morningstar Wide Moat Focus index has outpaced the S&P 500 by more than five percentage points since its 2002 launch.
Wide moat stocks tend to be big (as in globally dominant) established companies, and that leads to another tendency popular with income-seeking investors these days: they pay dividends. Eighteen of the 20 stocks in the Market Vectors Wide Moat ETF (MOAT), which tracks the Morningstar Wide Moat Index, pay a dividend. The ETF is a quarterly-rebalanced portfolio that owns the 20 cheapest wide moat stocks; cheapness is determined by Morningstar’s proprietary price/fair value analysis.
Berkshire Hathaway (BRK.B) is one of the dividend holdouts in Market Vectors Wide Moat’s current portfolio. While Warren Buffett recently offered a lengthy explanation in the annual shareholder letter why he doesn’t foresee paying a dividend, Berkshire Hathaway’s investment portfolio is a paean to dividend payers including Coca Cola, Wells Fargo (WFC), and Exxon-Mobil (XOM). The other Wide Moat dividend holdout is Express-Scripts (ESRX).
After creating a Watchlist of Market Vector Wide Moat’s current portfolio, sorting the 20 stocks by dividend yield presents an interesting list of stocks with above-average yields. Exelon (EXC) is at the top of the list with a 6.1% current dividend yield. But if you’re looking to pair wide moat and attractive dividend policy, Exelon is not an option. To preserve cash during a period of reduced power demand, Exelon recently announced a 41% dividend cut.
Intel (INTC) and Western Union (WU) are next on the list, with yields of 4.2% and 3.4% respectively. Those payouts are a sizable premium over the 2% yield on a 10-Year Treasury and sub-3% for high grade corporate debt. Moreover, their income streams have steadily increased.
Granted, both stocks have been major laggards over the past year, as seen in a stock chart.
More recently Western Union has shown signs of stabilizing; its 8.2% gain year-to-date only slightly trails the super-strong 9.7% gain for the S&P 500. Intel -- along with much of the Info Tech sector -- remains on the outs with a comparatively sluggish 3.2% gain year to date. But the fact that the chip maker is no longer moving down when the market is heading higher (as was the case in the second half of 2012) suggests the Street is warming to its value proposition, if just a smidge. Both Intel and Western Union have trailing 12-month PE ratios below 10. Their forward PE’s are 11, about a 30% discount to the market. That’s pretty cheap for some wide moat stand outs.
The next highest yielder on the list is General Electric (GE) with a 3.3% current dividend yield. To be clear, General Electric is still working its way out of the dividend doghouse. It slashed its payout more than 60% in 2009 to shore up a balance sheet reeling from losses in its finance unit. Fast forward a few years and GE has reduced the size of its finance unit while refocusing on its core industrial machinery production. A repaired flow of free cash has coincided with a rising dividend, as shown in the chart below.
Earlier this year, GE telegraphed more cash will be returned to shareholders. It plans to use $10 billion of the $12 billion in cash it will receive for selling its remaining 49% stake in NBC Universal to Comcast (CMCSA) to buy back shares. At its current price that would reduce GE’s total shares outstanding by about 4%. Add that to the current 3.3% yield and you’ve got a compelling net payout yield (dividend yield plus share buyback yield) that will rise above 7%.
And with a dividend payout ratio now back around 50%, there’s room for GE to continue to raise the dividend as well.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.