Savvy investors often look to billionaire portfolios for quality dividend stock ideas. Ray Dalio, founder of Bridgewater Associates, has a stellar reputation for spotting promising investments. Despite Dalio's retirement in 2022, his influence remains evident in the hedge fund's recent moves.
In the second quarter of 2024, Bridgewater Associates purchased shares of three tier 1 dividend stocks: ExxonMobil (XOM -1.69%), Medtronic (MDT +1.15%), and Microsoft (MSFT -2.04%). Let's examine each of these stocks to determine if they deserve a place in your dividend portfolio.
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ExxonMobil: An energy giant with an attractive yield
ExxonMobil, one of the world's largest integrated oil and gas companies, has long been a favorite among dividend investors. The company offers a compelling yield of 3.29% with a conservative payout ratio of 44.9%. Over the past decade, ExxonMobil has grown its dividend at a modest rate of 2.66% annually.
NYSE: XOM
Key Data Points
The stock's performance has been mixed, with a 10-year return of 16.5% excluding dividends. However, when including reinvested dividends, the total return jumps to 80.1%. While impressive, this still lags the S&P 500's total return (including dividends) of 231% over the same period. ExxonMobil currently trades at an attractive forward price-to-earnings (P/E) ratio of 12.1.
Upside catalysts for ExxonMobil include its response to shareholder concerns, such as reduced spending, new board appointments, and emission reduction targets. The company's shift toward liquids pricing and high-value integrated operations could improve cash margins, particularly with new volumes from the Permian Basin and Guyana.
However, ExxonMobil faces significant downside risks. The company's continued investment in long-life hydrocarbon projects could lead to stranded assets if oil demand peaks and declines sooner than expected. Additionally, ExxonMobil's relatively low investment in low-carbon businesses compared to peers may pose challenges in adapting to a changing energy landscape.
Medtronic: A top healthcare innovator
Medtronic, a global leader in medical technology, offers a compelling combination of stability and growth potential. The stock yields 3.15%, although its high payout ratio of 93.2% may raise some eyebrows. Over the past decade, Medtronic has grown its dividend at a healthy rate of 6.3% annually.
The company's stock performance has been modest, with a 10-year return of 38.3% excluding dividends and a total return of 75.7% including reinvested dividends. Like ExxonMobil, this trails the S&P 500's performance. Medtronic trades at a forward P/E ratio of 16.3.
Medtronic's upside potential stems from its dominant market position in core heart devices, spinal products, insulin pumps, and neuromodulators. The company's robust pipeline, including treatments for atrial fibrillation, mitral valve disease, and renal denervation for hypertension, could open up new large markets. Medtronic's innovative approach to applying familiar technologies to new medical challenges is another strength.
On the downside, Medtronic faces increasing competition in the insulin pump market, which could threaten its leadership position. The company is also indirectly subject to Medicare reimbursement rates, and increasing pressure on payments could hurt profitability. Product recalls, although infrequent, remain a concern that requires ongoing attention and resources.
Microsoft: A tech giant with a growing dividend
Microsoft might not be the first name that comes to mind for dividend investors, but the tech giant has been steadily increasing its payout. The stock offers a modest yield of 0.73% with a conservative payout ratio of 24.8%. Over the past decade, Microsoft has grown its dividend at an impressive rate of 7.6% annually.
NASDAQ: MSFT
Key Data Points
Where Microsoft truly shines is in its stock performance. The company has delivered a staggering 10-year return of 810% excluding dividends, and a total return of 965% including reinvested dividends. This significantly outperforms the S&P 500. Microsoft trades at a premium forward P/E ratio of 30.8, reflecting high growth expectations.
Microsoft's upside potential is driven by its strong position in the public cloud market with Azure, which is benefiting from the evolution to hybrid and public cloud environments. The continued success of Microsoft 365, with customers willing to pay for better security and additional features, is another growth driver. Microsoft's dominant positions in operating systems and office software serve as cash cows to fuel growth in other areas.
However, Microsoft faces some downside risks. The momentum in shifting to subscriptions is slowing, particularly in mature products like Office. The company lacks a meaningful mobile presence, which could be a disadvantage in an increasingly mobile-first world. Additionally, Microsoft is not the top player in some of its key growth areas, notably Azure and Dynamics, which could limit its potential in these markets.
Should you follow Bridgewater's lead?
Dalio's Bridgewater Associates has been buying three diverse dividend stocks, each offering unique attributes for income-focused investors. ExxonMobil provides a high yield and long dividend history, but it operates in a rapidly changing energy sector. Medtronic offers stability and growth potential in the high-growth healthcare industry. Microsoft, while offering a lower yield, sports a strong dividend growth record backed by a powerful tech business.
Are these dividend stocks worth buying? For income investors, ExxonMobil, Medtronic, and Microsoft are always worth considering. These three companies have shown a rock-solid commitment to rewarding shareholders with regular dividend payments and increases to their quarterly cash distributions. They also sport entrenched market positions, ensuring long-term profitability.
So, if you're looking for a trio of top dividend stocks to add to your portfolio, these three Bridgewater Associates holdings may be worth a closer look.
