When investors are looking for long-term buy-and-hold investments, there are different angles to consider. Resilience during recessions, strong management, sound fundamentals, such as high margins and returns on capital, and healthy balance sheets are positives.
Another important factor to consider is the concept of economic moats. This concept was popularized by legendary investor Warren Buffett and can be explained as a form of durable competitive advantage. Some wide moat stocks are well-positioned to endure long-lasting advantages versus competitors, due to their strong brands, network effects, cost advantages, technological leadership and more.
This makes it very hard for competitors to gain market share versus these companies. In turn, this allows for above-average growth rates, as well as industry-leading profit margins. These factors make wide-moat dividend stocks like the three listed here attractive for investors.
| MSFT | Microsoft | $250.20 |
| ICE | Intercontinental Exchange | $107.09 |
| CMCSA | Comcast | $35.15 |
Microsoft (MSFT)
Microsoft (NASDAQ:MSFT) is one of the biggest companies in the world by market capitalization and a leading software player. It produces and sells a wide range of products, but the most important ones are its operating systems (Windows) and its Microsoft Office suite that is used by businesses and consumers. In both these key business franchises, Microsoft enjoys a very wide and very durable moat.
Windows is, by far, the most-used operating system for computers in the world, which provides a powerful network effect. Programmers develop their offerings for Windows primarily, as that is the largest market. Consumers and businesses want their systems to run on Windows, as that is where the largest number of programs and applications is available. Competing operating systems have a very hard time making inroads versus Windows.
Likewise, the company’s Office suite is by far the most-used for both businesses and consumers. Switching to a different offering by another company is complicated and costly for businesses. It also poses major risks if anything goes wrong. That is why Microsoft’s massive market share in this area has not been threatened in the past. It seems likely that this will hold true in the future, too.
Overall, this makes Microsoft one of the widest-moat companies investors can put their money in. Microsoft’s excellent margins and returns on invested capital are a result of its competitive advantages, as there is no pricing pressure on the company.
Microsoft currently trades with a dividend yield of 1.1%. That’s not overly high, but the company has increased its dividend for an impressive 21 years in a row. On top of that, its dividend growth rate has been attractive, averaging 11% over the last decade. Last but not least, Microsoft’s dividend is extremely safe. Not only does the company have an AAA-rated balance sheet, one of just two publicly traded companies that have achieved this feat, but Microsoft’s dividend payout ratio is also pretty low, at less than 30%.
Overall, Microsoft is a wide-moat company with attractive dividend properties, although those investors that want a high initial yield may not deem it attractive.
Intercontinental Exchange (ICE)
Intercontinental Exchange (NYSE:ICE) is a financial exchange operator that also is active in some financial technology areas, such as trading support, pricing data and so on. It owns the famous New York Stock Exchange among others, including for derivatives, futures, soft commodities and so on.
Intercontinental Exchanges’ ownership of NYSE and the very strong brand that comes along with it serves as a major competitive advantage. Traders and investors flock to the most well-known exchanges, as these are the most liquid ones where trading spreads generally are the lowest. When it comes to financial exchanges, powerful network effects are at play. Intercontinental Exchange benefits from that. Proprietary exchange products and technologies further enhance Intercontinental Exchange’s moat versus potential competitors and new market entrants.
Thanks to these competitive advantages, Intercontinental Exchange operates very profitably. During the most recent quarter, for example, Intercontinental Exchange generated a very impressive net profit margin of 40%, as it managed to generate a net profit of $730 million with just $1.8 billion in revenue. With margins this high, each incremental dollar of revenue has a large impact on the company’s bottom line.
Based on current prices, the $1.52 per year dividend translates into a 1.4% dividend yield. With a 10-year dividend-growth track record and double-digit dividend growth, Intercontinental Exchange has valuable dividend-growth properties. The payout ratio of 28% suggests that the dividend is very safe and that there is a lot of room for further dividend growth.
Comcast (CMCSA)
Comcast (NASDAQ:CMCSA) is a leading media, entertainment and communications company. Key businesses include Cable Communications (including high-speed internet, video and wireless) and NBCUniversal, which offers cable networks, broadcast TV and other forms of entertainment.
There are high barriers to enter the markets Comcast is active in. A new emergent cable company would have to spend many billions of dollars to build out the infrastructure that Comcast already has in place, for example. Likewise, hefty marketing and technology spending would be required from new market entrants in broadcast TV and entertainment networks. Comcast thus is active in a market with just a few players. Pricing is not an issue for the company, as none of its peers are interested in pricing wars.
As a result, Comcast has been able to operate very profitably in the past. And its earnings per share and dividend have grown very meaningfully over the last decade.
The company’s dividend has risen for 14 years in a row, and the dividend growth rate was quite attractive over the last decade, averaging 13% a year. At current prices, Comcast trades with a dividend yield of 2.9%, which is considerably more than the yield the broad market offers today. It’s also the highest yield among the companies featured in this article. And yet, at around 30%, the dividend payout ratio is not high at all.
Comcast has recently seen its valuation decline, which is why we believe that shares are trading below fair value right now. In combination with the substantial moat, the compelling yield and dividend growth, and rather low payout ratio, Comcast looks like a compelling income pick at current prices.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
