How a Smart Move by Buffett Means a Small Hit to My Portfolio

Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) completed its acquisition of Nevada electric generator NV Energy (NYSE: NVE  ) this past week. That deal was originally expected to close in the first quarter of 2014, so it finished ahead of schedule. That early close is a testament to Warren Buffett's Berkshire Hathaway and its ability to get things done. Still, it did make the deal a bit less lucrative for the real-money Inflation-Protected Income Growth portfolio, which owned NV Energy's shares.

Had the deal closed as expected in the first quarter of 2014, the iPIG portfolio's gain on NV Energy would have been treated as long-term for capital-gains tax purposes. Since it closed early, the gain will be treated as short-term and will be taxed at a higher rate. In addition, because the acquisition was treated as a mandatory reorganization rather than as a stock sale, the brokerage fee the portfolio got hit with is higher than a typical sales commission.

Still, a gain is a gain
Despite those higher-than-anticipated taxes and transaction costs, the price Berkshire Hathaway paid for NV Energy is more than NV Energy looked to be worth as an independent company. The acquisition price clearly factored in the efficiencies that Berkshire Hathaway's MidAmerican Energy unit expects to see from expanding its scale. So in the end, it's still a reasonable deal for the iPIG portfolio; it's just not quite as lucrative as originally expected.

In addition to the sales proceeds, the iPIG portfolio received its last-ever dividend from NV Energy this past week. McDonald's (NYSE: MCD  ) also paid its dividend this past week. McDonald's dividend of $0.81 per share is up from the $0.77 per share the fast-food titan paid last quarter, continuing the streak of dividend growth that helped make it an attractive pick for the iPIG portfolio.

Between McDonald's dividend, NV Energy's dividend, and the surprise timing of the NV Energy acquisition, the iPIG portfolio's cash coffers have swollen by more than $2,000 since last week's update. That's enough to justify finding another company's stock to fit in the portfolio, and so the search begins.

What to look for?
There are a handful of key criteria that make a company's stock worth holding in the iPIG portfolio. In essence, every selection should:

  • Have a history of paying and raising its dividend
  • Look like it's capable of continuing to increase its dividend in the future
  • Have a healthy enough balance sheet that debt rollovers won't likely cause trouble
  • Appear reasonably priced by some fundamentals-based valuation technique
  • Fit reasonably well with the rest of the portfolio from a diversification perspective

Companies that fit all five criteria are hard to find, but suggestions are certainly welcome. If you know of a company that might fit, let us know on the iPIG portfolio's message board (free registration required).

In the meantime, the table below shows the state of the iPIG portfolio as of market close on Dec. 20, 2013:

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
Dec. 20, 2013

Current Yield
Dec. 20, 2013

United Technologies

Dec. 10, 2012

$1,464.82

$1,991.88

2.13%

Teva Pharmaceutical

Dec. 12, 2012

$1,519.40

$1,501.38

3.22%

J.M. Smucker (NYSE: SJM  )

Dec. 13, 2012

$1,483.45

$1,736.04

2.27%

Genuine Parts

Dec. 21, 2012

$1,476.47

$1,880.71

2.63%

Mine Safety Appliances (NYSE: MSA  )

Dec. 21, 2012

$1,504.96

$1,805.76

2.39%

Microsoft (NASDAQ: MSFT  )

Dec. 26, 2012

$1,499.15

$2,024.00

3.04%

Hasbro (NASDAQ: HAS  )

Dec. 28, 2012

$1,520.60

$2,257.07

3.05%

United Parcel Service (NYSE: UPS  )

Jan. 2, 2013

$1,524.00

$2,066.60

2.4%

Walgreen 

Jan. 4, 2013

$1,501.80

$2,361.60

2.13%

Texas Instruments (NASDAQ: TXN  )

Jan. 7, 2013

$1,515.70

$2,013.48

2.8%

Union Pacific 

Jan. 22, 2013

$805.42

$981.60

1.93%

CSX (NYSE: CSX  )

Jan. 22, 2013

$712.50

$954.72

2.14%

McDonald's (NYSE: MCD  )

Jan. 24, 2013

$1,499.64

$1,544.16

3.36%

Becton, Dickinson 

Jan. 31, 2013

$1,518.64

$1,959.84

2%

AFLAC 

Feb. 5, 2013

$1,466.35

$1,772.55

2.25%

Air Products & Chemicals (NYSE: APD  )

Feb. 11, 2013

$1,510.99

$1,892.10

2.55%

Raytheon (NYSE: RTN  )

Feb. 22, 2013

$1,473.91

$2,386.53

2.49%

Emerson Electric (NYSE: EMR  )

April 3, 2013

$1,548.12

$1,941.52

2.48%

Wells Fargo

May 30, 2013

$1,525.48

$1,663.52

2.67%

Kinder Morgan

June 21, 2013

$1,518.37

$1,479.24

4.66%

Cash

   

$2,714.67

 

Total Portfolio

   

$38,928.97

 

Data from the iPIG portfolio's brokerage account, as of Dec. 20, 2013.

 

Dividend paying companies make great long term investments
Warren Buffett has compared getting bought out by Berkshire Hathaway to getting your own wing in the Metropolitan Museum. The companies Buffett buys for Berkshire Hathaway, such as NV Energy, are generally ones that produce prodigious amounts of cash and that can sustain strong dividends for their owners for a long time.

Over the long term, the compounding effect of those payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify nine rock-solid dividend stocks in this free report. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

To follow the iPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the iPIG portfolio, simply click here.


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