3 Dividend Aristocrats From Warren Buffett's Portfolio

Coca-Cola, ExxonMobil, and Procter & Gamble are among the most remarkable dividend companies in the market, and they are also part of Warren Buffett's portfolio. Do they deserve a place in your portfolio, too?

May 9, 2014 at 9:30AM

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Dividend aristocrats are a select group of companies that have proven their extraordinary fundamental strength by raising their dividends over 25 consecutive years or more. Coca-Cola (NYSE:KO), ExxonMobil (NYSE:XOM), and Procter & Gamble (NYSE:PG) are not only included in that exclusive bunch, but they are also part of Warren Buffett's investment portfolio of high-quality names to hold for the long term.

Always Coca-Cola
Coca-Cola is one of Warren Buffett's biggest and most paradigmatic holdings. Buffett is all about competitive strengths, and Coca-Cola's brand differentiation, marketing power, and unparalleled global distribution network provide extraordinary competitive strengths for investors in the company.

Coca-Cola is facing considerable challenges as consumers in developed markets move away from sodas and toward healthier alternatives. In addition, recent controversy over executive compensation raises some red flags for investors, and Coca-Cola needs to tackle these concerns in a sensible and shareholder-friendly way.

However, Coca-Cola still has room for substantial volume growth in emerging markets, both in carbonated drinks and healthier choices: Sales volume in China increased by an impressive 12% in the first quarter of 2014, while volume in Brazil grew 4% during the period.

In addition, still beverage brands account for approximately one-quarter of the company's total global volume, and the segment is producing solid performance, with volume expanding by 8% in the first quarter of 2014 as the company gained both volume and value share in the category.

Coca-Cola has raised its dividends for 52 uninterrupted years, including a 9% hike announced in February. The dividend yield is currently in the area of 3%, which looks like an attractive valuation considering the company's quality and outstanding track record of dividend growth. Coca-Cola has a sustainable payout ratio in the area of 58% of earnings estimates for the current year.

ExxonMobil is fueling dividend growth
ExxonMobil stands out among integrated energy companies because of its gigantic size and wide global reach. With a market capitalization of nearly $445 billion, the company is not only a leading player in its industry, but also one of the biggest corporations on the planet.

Global presence and remarkable financial strengths are valuable strategic assets for ExxonMobil when competing for exploration projects around the world, even if the company is having a hard time when it comes to finding new projects that are big enough to have a considerable impact on revenues while at the same time providing an adequate return for the risks assumed.

The energy business is usually considered a sector with above-average risk because of the cyclicality and volatility produced by fluctuating commodity prices. However, ExxonMobil has consistently proven over time that the company is no average energy player by any means.

ExxonMobil has paid uninterrupted dividends for more than 100 years, and the company has raised payments over the last 32 years in a row. The latest increase was announced on April 30, and the company raised distributions by 9.5%, from $0.63 to $0.69 per share quarterly.

The dividend yield stands at 2.4% and ExxonMobil has a conservatively low payout ratio of less than 33% of average earnings estimates for 2014.

Procter & Gamble: King among dividend kings
Among dividend aristocrats, Procter & Gamble makes most of its peers look like humble plebeians because of its extraordinary track record of dividend growth. The company has paid uninterrupted dividends since its incorporation in 1890, which means 124 consecutive years of consistent dividend payments. In addition, Procter & Gamble has increased distributions over the past 58 years in a row; this includes a 7% increase announced on April 7.

The dividend yield, in the area of 3.2%, is quite attractive for such a strong company with an immaculate trajectory of dividend growth, and the dividend payout ratio is sustainable at nearly 61% of earnings estimates for 2014.

Procter & Gamble is a market leader in several consumer household categories, doing business in more than 180 countries around the world and benefiting from tremendous brand power, as the company owns 25 brands generating more than $1 billion in global revenues each.

Market leadership in a stable and mature industry can be problematic when it comes to generating sales growth. However, it also allows Procter & Gamble to produce reliable and consistent cash flows over time, and management has demonstrated its commitment to rewarding shareholders with growing capital distributions in the long term.

Foolish takeaway
Companies generating consistent dividend growth tend to deliver above-average returns for investors over time. Coca-Cola, ExxonMobil, and Procter & Gamble are among the most remarkable dividend growth companies in the market, and they're also part of Warren Buffett's investment holding portfolio. If they are good enough for the Oracle of Omaha, maybe they deserve a place in your portfolio, too.

The best dividend stocks for your portfolio
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Procter & Gamble. The Motley Fool owns shares of Coca-Cola and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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