Enjoy that wimpy interest rate from your bank account? Of course not, and billionaire Warren Buffett doesn't care for those paltry rates, either. I've dug through Berkshire Hathaway's portfolio and found some high-quality companies paying dividends that make your checking account look weak. Some of these stocks are hand-picked current or former picks by the Oracle himself, while Intel (Nasdaq: INTC) is the handiwork of Buffett heir apparent Todd Combs.
In any case, they're all great companies with defensible moats trading at attractive prices and spinning off dividends. Let's look at a few.
The contenders and their yields
| Coca-Cola (NYSE: KO) | 2.8% |
| General Electric (NYSE: GE) | 4% |
| Intel | 3.6% |
| Johnson & Johnson (NYSE: JNJ) | 3.6% |
Source: AOL Daily Finance.
Each of these contenders has a nice dividend yield above the average yield of the S&P 500, 2.57%. Let's now look at each of these companies' dividend histories, payout ratios, free cash flow-to-payout ratio, and their ability to grow through capital appreciation.
Dividend history
| Coca-Cola | 49 years |
| General Electric | 49 years |
| Intel | 19 years |
| Johnson & Johnson | 49 years |
Source: divdata.com.
Each of these companies has a strong history of paying dividends. This is a healthy sign when looking at dividend stocks. Although it doesn't necessarily indicate how the company will operate in the future, it at least shows the companies' commitment to distributing cash to its shareholders and their ability to pay a dividend going forward.
Payout ratio
We next take a look at what these four stocks do with their money. This indicates what percentage they pay out to shareholders as dividends versus how much they reinvest into the company.
| Coca-Cola | 54% |
| General Electric | 48% |
| Intel | 32% |
| Johnson & Johnson | 54% |
Source: AOL Daily Finance.
I like to see the payout ratio below 80%. Each of these companies clears that hurdle, so all is good here.
Capital appreciation
Dividends are great, but they're only one component of returns. Investors also should seek strong capital appreciation through share-price growth. Let's take a peek at each company's compound annual growth rates when factoring in both dividends and share-price growth:
Compound annual growth rate over past 5 years, including dividends
| Coca-Cola | 9.6% |
| General Electric | (10.9%) |
| Intel | 6.7% |
| Johnson & Johnson | 2.5% |
You've heard it said that past performance isn't an indicator of future success. However, aside from General Electric, which saw its share price inflated during the financial bubble, the other companies on the list have managed to provide consistent returns. Coca-Cola in particular has seen great growth as it continues expanding its product lines and increasing its sales by selling into emerging markets.
Summary
Each of these dividend stocks has good yields, strong histories of paying dividends to shareholders, and healthy payout ratios. Where the companies differentiate themselves, in our analysis, is in the capital-appreciation area of our screen, where Coca-Cola takes the win.
Looking forward, Coca-Cola should continue to be a reliable yet strong performer. Nothing flashy, but an ironclad brand with plenty of room for expansion -- just the kind of qualities Buffett loves.
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