by Charles Sizemore | November 19, 2013 9:42 am
Now and then, it is nice to take a peek over the shoulder of a “master of the universe” to see what his or her high-conviction buys are, be they hot growth prospects or tried-and-true dividend stocks. When you read a headline that “Warren Buffett is buying Company X,” you’re naturally inclined to do a little digging into Company X’s financials.
After all, if it’s good enough for Warren Buffett, it might be good enough for you.
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You have to be careful with this line of thinking, of course. The SEC 13F filings that disclose these holdings are generally pretty dated by the time we have access to them. For all we know, the conditions that made a guru buy a given stock may no longer be valid by the time we read about it, and there are no guarantees that these managers haven’t already sold it. There also is no way to track hedges or offsetting short positions in the event the stock is part of a pair trade, nor are derivatives or options positions mentioned at all.
For these reasons, I tend to focus on larger holdings — the conviction buys that fund managers are likely to hold onto for a while.
Today, I’m going to look at high-conviction dividend stocks from five well-known superinvestors. My criteria is simple enough: The stock must be a significant holding in the guru’s portfolio, and it must pay a respectable dividend.
Dividend Yield: 2.6%
I’ll start with Warren Buffett.
Earlier this week, I wrote a short piece that gave the rundown on Berkshire Hathaway’s (BRK.B) latest portfolio moves, and particularly its accumulation of dialysis provider DaVita (DVA). Well, as much as I like DaVita, it can’t be counted among dividend stocks with a payout of zero, so it is off limits for this particular article.
But Exxon Mobil (XOM) is a very different story.
Berkshire Hathaway made a $3.5 billion investment in XOM, reinforcing my belief that the global oil majors are a bargain after a disappointing couple of years in the market. Yes, earnings growth has been modest. But at just 12.4 times earnings and 1.1 times sales, Exxon is being priced as if it will never grow again.
Exxon Mobil also happens to be a dividend-raising powerhouse — XOM has raised its dividend for 31 consecutive years (and counting) at an average annual rate of 6.3% over the period. And there is plenty of room for more; its dividend payout ratio is a modest 31%.
At current prices, XOM sports a dividend yield of 2.6%, just slightly less than what you can get from a 10-year Treasury note. But 10 years from now, Exxon’s payout is likely to be 80% to 90% more than it is today, whereas the Treasury’s coupon payment will be unchanged.
If those are my two choices, I’m going with Exxon.
Dividend Yield: 10.3%
Next, let’s take a look at the portfolio of Hayman Advisors’ Kyle Bass.
Bass is a Dallas-based hedgie best known as a macro trader and as a major long-term bear on Japan. (I share Bass’s view on Japan, but that is another story for another day.)
But while Bass is best known as a “big-picture” macro guy, he’s also a talented stock picker. And he happens to share my current enthusiasm for mortgage REITs. His stake in PennyMac Mortgage Investment Trust (PMT) makes up 20% of his long portfolio.
I should clarify one point — I’m not a big fan of mortgage REITs as a long-term asset class. Unlike equity REITs, which invest in real property, mortgage REITs do nothing but buy and sell mortgages and mortgage securities. They’re essentially variable-rate bonds with all the risks of equities.
But to everything there is a season, and right now mortgage REITs are attractive. The spread between their borrowing and lending rates are some of the highest in years, and many trade for significantly below their book value. It’s hard to lose money when you buy dollar bills for 80 or 90 cents.
PennyMac currently pays a dividend of 10.3%, and it trades at book value. Rather than buy a single mortgage REIT like this, I would be inclined to buy a basket of several mREITs or to go the “one-stop shop” route and buy a mortgage REIT ETF such as iShares Mortgage Real Estate Capped (REM).
Dividend Yield: 4.7%
Next on the list is Prem Watsa, the founder of Fairfax Financial (FRFHF).
Watsa is sometimes called the “Warren Buffett of Canada” due to both his value investing prowess and the fact that, like Buffett, he uses an insurance powerhouse as the foundation of his investment empire.
Watsa has a little egg on his face at the moment. He accumulated an enormous position in BlackBerry (BBRY) that now makes up a full quarter of his long stock portfolio.
I wouldn’t touch BlackBerry, even at current prices. But one of Watsa’s newer dividend stocks caught my attention: British oil major BP (BP).
Like Warren Buffett, Watsa appears to see value in Big Oil. And BP is one of the highest-yielding mega-caps on the market — the company sports a dividend yield of 4.7%.
BP slashed its dividend in half after the 2010 Deepwater Horizon oil spill in the Gulf of Mexico hit the company like a wrecking ball. Total criminal and civil settlements and payments have already totaled more than $40 billion, and the final total might not be known until 2014 or later.
Yet the company has managed to get on with business, and it has raised its dividend in each of the past two years.
Dividend Yield: 5.1%
Let’s now jump to the portfolio of Oaktree Capital’s Howard Marks.
Marks is one of the most respected investors in the business, and I reviewed his most recent book, The Most Important Thing Illuminated, earlier this year. (Warren Buffett, incidentally, laconically called it “that rarity, a useful book.”)
Marks initiated a position last quarter in the mother of all dividend payers: Big Tobacco giant Altria (MO).
I’ve been fairly bearish on Big Tobacco for the past year, and I consider Altria to be a little on the pricey side given its lack of growth prospects.
That said, if the market cools off after its recent blistering rise, a defensive name like Altria will probably hold up better than most. And its 5.1% dividend yield is nearly double the yield on the 10-year Treasury.
Altria is not my favorite dividend stock. But you could do worse.
Dividend Yield: 3%
And finally, we get to the granddaddy of all macro traders, the legendary George Soros himself.
Soros is best known as the man who bankrupted the Bank of England (and pocketed a cool billion for himself in a single day) by shorting the pound in 1992.
Soros’ funds are no longer open to outside investors, and that is a shame. During the Quantum Fund’s heyday between 1969 and 2000, Soros generated 32% average annual returns.
So what are Mr. Soros and his associates buying these days?
One recent addition that caught my eye was Microsoft (MSFT). Microsoft has really stepped up its game in recent years as a premier dividend payer. It currently yields 3%, which is among the highest on the market for a tech stock.
Microsoft grew its dividend 20% in 2013 … after growing it 25% in 2012 and 23% in 2011. The dividend has more than doubled since 2008, and there is plenty of room for more. MSFT’s dividend payout ratio is only 34%.
The company has taken heat for botching the Windows 8 rollout with a user interface that alienates its core clientele — desktop and laptop PC users. More broadly, investors hate the fact that Microsoft “missed” mobile and is stuck in a long uphill fight playing catchup.
All of this is true. Yet MSFT still has managed to grow its earnings at a healthy clip through robust sales of its Office suite, its server business and its other services for enterprise clients. If the company ever catches up in mobile — and it appears to be making headway — consider it icing on the cake.
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Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long DVA, MO and MSFT. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series includes a FREE copy of his 2014 Macro Trend Profit Report.
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