3 Dividend Stock Favorites of Warren Buffett

Risk-averse investors are increasingly turning to stocks that provide a reliable stream of income. Certificates of deposit (CDs) no longer pay high enough interest rates to generate meaningful income. After 2008, many investors no longer want to hold in non-dividend paying stocks for fear of losing principal. More than ever, investors are living by the old adage “the yield is your shield.”  Investing in stable, mature dividend paying stocks is one conservative approach to portfolio risk management and provides a decent income.

The most popular conservative investing name in the business is Warren Buffett. One way to benefit from Mr. Buffett’s approach to investing is to invest in the company he runs, Berkshire Hathaway ($BRK.A) ($BRK.B).  But Berkshire does not pay a dividend. So how can a self-directed investor benefit from Buffett’s stock picking prowess and earn a reliable income?

In late February, Warren Buffett released Berkshire Hathaway’s 2009 annual report and his annual letter to Berkshire shareholders. An approach used by many income investors is to identify the highest yielding dividend paying companies owned by Berkshire Hathaway and spend some time doing due diligence to identify top plays.

The following are three high paying and stable dividend paying stocks held by Berkshire Hathaway that are likely to increase in value over time.

Kraft Foods Inc.

Kraft Foods ($KFT) has an above-average annualized dividend yield of 4.0 percent, and a forward price to earnings ratio of 14.1. It is one of the strongest brands in the business. Kraft Foods Inc., and subsidiaries manufacture and market packaged food products including snacks, beverages, confectionary, cheese and dairy products, desserts, frozen pizza, packaged dinners, and processed meats. The firm’s “brands” are common household goods including Oscar Mayer, Oreo, Maxwell House, and Nabisco.

For the quarter ended December 31, 2009, Kraft reported earnings of $710.0 million or 48 cents per share compared with $824.0 million or 55 cents per share for the prior quarter and $101.0 million or 7 cents per share for the same quarter one year ago.

Kraft Foods has a favorable value and growth profile. Kraft continues to expand its global distribution network with the recent acquisition of Cadbury illustrates.

During the last few years, Kraft has been undergoing substantial restructuring efforts to lower the company’s cost structure with workforce reductions, consolidation of facilities, dumping less profitable brands, and adding fast growing and profitable goods.

Regardless of where the economy is headed, the company’s brand recognition and expansive global distribution network can be expected to generate considerable cash flow into the future.

On a positive note, the Illinois-based company regained coverage by analysts at Credit Suisse with an “Outperform” rating. Credit Suisse also put a $35 price target on Kraft, which had closed at $29.38 on Wednesday, March 10. Sabrient Systems, an independent equity research firm, has a “Buy” rating on Kraft as of March 8, 2010.

The chart below shows solid dividend growth for Kraft Foods over the past 5 years.

Source: www.ycharts.com

The Travelers Companies, Inc

The Travelers Companies, Inc. ($TRV) has a 2.5 percent annualized dividend yield and a forward price to earnings ratio of 9.1. Through subsidiaries, Travelers provides commercial, personal property, and casualty insurance products to businesses, government units, associations, and consumers in the United States.

For the quarter ended December 31, 2009, Travelers reported earnings of $1.3 billion or $2.36 per share solidly beating consensus expectations. The company earned $934 million or $1.65 per share for the third quarter of 2009 and $800 million or $1.35 per share for the fourth quarter of 2008. The 2009 earnings were $6.33 per share compared with $4.81 per share for 2008.

Travelers’ has a favorable value and growth profile. Travelers has a history of repurchasing shares, most recently in the fourth quarter when it bought back $1.55 billion worth of common stock.

With legacy reserves in asbestos liabilities stable since 2005, the company has put behind it a major drag on the share price. Even better, the company avoided much of the investment leveraging excesses of its peers over the past decade. As a result, Travelers has opportunities to gain market share in underwriting from weaker competitors. Travelers enjoys return on equity higher than its cost of capital since merging with St. Paul Company. In addition, Travelers has a new direct-to-consumer initiative for improving growth in the future.

Sabrient Systems, an independent equity research firm, has a “Strong Buy” rating on The Travelers Company as of March 8, 2010. Travelers was trading at $52.89 a share at the close on Wednesday, March 10.

The chart below shows solid dividend growth for The Travelers Companies over the past 5 years.

Source: www.ycharts.com

ConocoPhillips

Another Buffett high yielder is the international integrated energy company ConocoPhillips ($COP), which yields 3.9 percent and has a forward PE of 8.8. The company headquartered in Houston, Texas has been around since 1917, and has raised its dividend every year since the year 2001. Its payout ratio is less than 25 percent.

ConocoPhillips is engaged in the exploration and production of oil and natural gas, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses. The company has six operating units including exploration and production representing 69 percent of earnings, refining and marketing (15%), LUKOIL Investment (11%), midstream (3%), chemicals (1%) and emerging businesses (1%).

For the quarter ended December 31, 2009, ConocoPhillips reported earnings of $1.2 billion or 81 cents per share compared with $1.5 billion or $1.00 per share for the third quarter of 2009. The last twelve months earnings were $3.24 per share compared with $-11.16 per share in 2008.
ConocoPhillips’s strong value profile makes it one of the better dividend paying value stocks available in the market. The company produces a higher proportion of natural gas than competitors and should benefit from the environmental push to shift energy consumption away from coal and oil towards natural gas. Agreements with national oil companies should continue to provide opportunities for revenue growth amid a long-term market that is likely to sustain historically high prices for oil and gas. ConocoPhillips also has significant pipeline operations and other distribution assets that offer steady revenue.

One negative for Warren Buffett fans is Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) has reduced its stake in ConocoPhillips by 34 percent, down to still significant 37.7 million shares.

A risk for ConocoPhillips is the White House budget to Congress for FY 2011 repealed several key tax incentives for the oil industry that has a disproportionate impact on independent, integrated oil and gas producers with large domestic operations. The final decisions have yet to be made by the Congress on the proposal. Investors may want to keep an eye on the proposal as it winds its way through Capitol Hill.

Sabrient Systems, an independent equity research firm, has a “Strong Buy” rating on ConocoPhillips as of March 8, 2010. ConocoPhillips shares were trading at $51.47 per share on Wednesday, March 10.

Though the chart below doesn’t show it, ConocoPhillips announced in October 2009 a 6.4 percent increase in the company’s quarterly common stock cash dividend—a bullish signal. The new quarterly dividend on the company’s common stock went to 50 cents per share, up from 47 cents per share previously.

The chart below shows solid dividend growth for ConocoPhillips over the past 5 years.

Source: www.ycharts.com

Conclusion

As an equally weighted investment bundle, these three companies pay an average annual yield of 3.4 percent and have an average forward price to earnings ratio of 10.7.

The Oracle of Omaha favors high quality dividend paying stocks with a competitive advantage in a stable industry. Companies with a record of increasing their dividends over long periods of time generally qualify as classic value stocks. The three companies listed above meet or exceed these standards and that is why they are in the Berkshire Hathaway portfolio of companies.

Disclosure: No Positions

Is Rogers Communications a Buy?

Toronto, Canada-based Rogers Communications ($RCI) declared a quarterly dividend of thirty two cents per share yesterday, an increase of 17 percent over the prior quarterly dividend of 29 cents per share.

Rogers has an annualized yield of 3.7 percent. The dividend payout ratio for Rogers Communications is at the upper edge of a recommended limit of 62.7 percent of earnings for the quarter.

The company was upgraded from neutral to buy yesterday by analysts at Bank of America/ Merrill Lynch.

Share prices fell 4.6 percent yesterday to close at $31.48. Rogers is currently trading 1.1 percent higher at $31.82 mid-morning today.

Rogers Communications operates a communications and media company with three segments in wireless, cable, and media. The company was founded in 1920 and is headquartered in Toronto, Canada.

For the quarter ended December 31, 2009, the company reported earnings of $310 million or 51 cents per share compared to a net loss of $138 million minus 22 cents per share for same quarter one year ago and $485 million or 79 cents per share for the third quarter of 2009.

The company generated double digit EBITDA growth. The wireless data segment grew 45 percent. Margin expansion was driven across all three major business segments.

Income investors should review Rogers’ trend of returning capital, growing free cash flow and providing shareholder value over the past year.

Several other companies were raising dividends in the past two weeks and may be of interest to investors.

Sherwin Williams ($SHW) announced its quarterly dividend of 36 cents per share, an increase of about 1 percent over its prior quarterly dividend in November of 35.5 cents. The company has an annualized dividend yield of 2.2 percent.

3M Company ($MMM) announced its quarterly dividend of 52.5 cents per share, an increase of about 3 percent over the previous quarter’s dividend payment of 51 cents. The  annualized dividend yield is 2.6 percent.

Randgold Resources ($GOLD) announced a dividend of 17 cents per share, an increase of about 31 percent over its prior quarterly dividend of 13 cents. Higher gold prices during the last quarter led to a huge jump in profits. As a growth company in a capital intensive industry, Randgold’s annualized dividend yield is a relatively low 0.23 percent.

United Technologies Corporation ($UTX) announced its quarterly dividend of 42.5 cents per share, an increase of about 10 percent over its prior dividend in November of 38.5 cents. The company has an annualized dividend yield of 2.5 percent.

Soft drink distributor Coca Cola Enterprises ($CCE) increase its quarterly dividend twelve percent to 9 cents a share, an annualized yield of 1.8 percent.

Avon Products Incorporated ($AVP) announced its quarterly dividend of 22 cents per share on February 9, an increase of about 5 percent over the previous quarterly dividend of 21 cents. The  annualized yield is 2.9 percent.

Compass Minerals International Incorporated ($CMP) announced its quarterly dividend of 39 cents per share, an increase of about 10 percent over its prior quarterly dividend of 35.5 cents. The company has an annualized dividend yield of 2.1 percent.

______

Disclosure: No positions

Walgreen Boosts Profits 20%, Citi Downgrades

America’s largest drug store chain, Walgreen Co, ($WAG) posted a 19.5 percent gain in quarterly profits, based largely on increases in prescription drug sales and flu shots.

First-quarter net income was $489 million, or 49 cents a share, versus $408 million, or 41 cents a share in the same period one year ago. The Deerfield, Illinois retailer earned 52 cents per share, excluding special items. Analysts were expecting Walgreen’s to earn 48 cents a share on revenue of $16.24 billion. Revenue was higher by $1.41 billion to hit $16.36 billion from $14.95 billion in the same year-ago period.

Walgreen and its Take Care in-store clinics have sold 5.4 million flu shots compared to 1.2 million for the entire flu season last year.

Despite the positive earnings results, analysts at Citi ($C) issued a “sell” recommendation and price target of $31 for Walgreen, an 18 percent fallback from the current share price of $36.69.  Citi’s  negative outlook is based on the slower square foot growth, higher expenses, and greater competition. These factors are expected to lower earnings growth going forward.

Walgreen operates over 7,140 drugstores, and plans to add wine and beer sales to many of its stores. The company pays a 1.5 percent annualized dividend.

Navistar Beats Consensus, Rallies 7%

Navistar International Corp. ($NAV) reported a fourth-quarter adjusted profit of $128 million, or $1.77 a share on Monday giving a strong boost to the share price this morning.  Analysts were expecting a profit of $1.53 a share on sales of $3.08 billion.

Unadjusted profits for the fourth-quarter were $86 million, or $1.19 a share, compared to a loss of $343 million, or $4.81 a share for the same period one year ago.

According to the commercial truck and engine manufacturing company, fourth quarter sales were higher than last year. Customers were purchasing more trucks in anticipation of higher prices next year resulting from stricter pollution standards on diesel exhaust.

Industry-wide retail sales of medium and heavy-duty trucks are expected to remain at low levels for next year, ranging from 175,000 to 215,000 trucks according to Navistar, reflecting the most unfavorable climate for truck purchases since the 1960s. Truck sales aren’t expected to increase significantly until 2011 due to the recent global financial crisis.

Navistar Inc. also announced yesterday that it has signed an agreement to acquire an interest in Danish technology company Amminex.

The Amminex technology is a customer-friendly metal ammine-based NOx reductant delivery system, and is a tool which Navistar engineers will use to explore exhaust gas NOx reduction for specific applications.

Daniel C. Ustian, Navistar chairman, president and chief executive officer stated. “By leveraging our assets and those of Amminex, this agreement supports Navistar’s three-pillar strategy of product leadership, competitive cost structure and profitable growth. Amminex offers another tool for Navistar to explore cost-effective, customer-friendly technologies that fit our MaxxForce Advanced EGR platform, meeting emissions requirements while removing the burden liquid urea places on the industry.“

Navistar shares were trading around $38 a share mid-morning today, a 7 percent gain from the previous day’s closing price.

Nike Beats Consensus Earnings Forecast

Late Thursday, athletic footwear and apparel maker Nike, Inc. ($NKE) posted fiscal second quarter profits  of $375 million, or 76 cents per share, beating consensus estimates by 5 cents. This compares to $391 million, or 80 cents per share, in the same quarter last year. Sales fell 4 percent from last year to $4.41 billion.

Nike indicated worldwide future orders were higher by 4 percent from last year. The Beaverton, Oregon based company also stated it expects revenue to rise in the mid-single digits over the next two quarters. The company reiterated it expects a moderate decline in sales for the full year.

Nike pays an annual dividend yield of 1.71 percent, based on last night’s closing stock price of $63.25.

Nike shares were up $1.25, or 1.98 percent in pre-market trading this morning.

Valero Declares Dividend, Yields 3 Percent

Valero Energy Corp. (VLO) announced last week that its Board of Directors declared a quarterly common stock cash dividend of 15 cents. The annualized dividend yield for Valero shares is 3.0 percent. Valero has steadily increased its dividend since 1997.

The dividend is payable on December 9, 2009, to stockholders of record at the close of business November 11, 2009. The ex-dividend date is November 9, 2009.

Since the beginning of 2009, Valero shares have lost ground with a negative 8.5 percent change in share price. In contrast, the S&P 500 index is up 22.5 percent. Valero’s share price is in a downward consolidation triangle converging near the 50-day and 200-day moving average.

On July 28, Valero reported second-quarter losses of $254 million or 48 cents loss per share compared to second quarter 2008 net income of $734 million, or $1.37 per share. The decline in operating income was primarily due to lower diesel and jet fuel margins and lower sour crude oil differentials versus the same quarter last year.

Valero Energy Corporation is a Fortune 500 company based in San Antonio and owns/operates 16 refineries in the United States, Canada and the Caribbean with a combined throughput capacity of approximately three million barrels per day, making it the largest refiner in North America. Valero is also a leading ethanol producer with seven ethanol plants in the Midwest with a combined capacity of 780 million gallons per year, and is one of the nation’s largest retail operators with approximately 5,800 retail outlets in the United States, Canada and the Caribbean.

Valero is a tough play right now with the U.S. economy likely bottoming out and consumer spending is unlikely to rise for at least several months. Refining has historically been one of the most cyclical areas of the energy industry. Currently, the industry is in the midst of a multi-year down cycle. Moreover, global refinery capacity is on the rise. As a result, overcapacity in the industry is likely to continue for several years. Pending carbon trading legislation in the U.S. Congress creates further economic uncertainty for refiners going forward.

There are dividend paying stocks within and outside the energy sector with much better reward to risk ratios than Valero Energy.

Goldman Beats Q3 Consensus and Sells Off

Goldman Sachs (GS) reported a jump in third-quarter earnings this morning on strong results from its trading and principal investments business. Goldman’s earnings per share (EPS) surged to $5.25, beating EPS of $1.81 in the same quarter in 2008 and consensus estimates of $4.24 profits per share.

Despite beating analyst expectations, shares of Goldman Sachs sank as low as $187.71 at the open this morning from the previous day’s close of $192.28. The share price bounced back a bit later in the morning, settling in around $188.30 at 11:30am. Investors appeared to be expecting a blowout number. Alternatively, a major drag on Goldman’s share price may be whether Goldman and other banks like Citigroup (C) have large enough loss reserves to cover remaining toxic assets.

The company reported net earnings in the third quarter of $3.0 billion, compared with $810 million for the year-ago quarter in 2008. 2008 same quarter profits were $845 million.

The top line for the quarter jumped from third quarter 2008 net revenue of $6.0 billion last year to $12.4 billion in the quarter ending September 25, 2009. Analysts were expecting top line revenue of $11.0 billion for the quarter.

Lloyd Blankfein, chairman and CEO said, “Although the world continues to face serious economic challenges, we are seeing improving conditions and evidence of stabilization, even growth, across a number of sectors.”

Net revenues by segment were $899 million in Investment Banking, 31 percent worse than the third quarter of 2008; $325 million in Financial Advisory, 47 percent lower than 2008; and, $10.0 billion in Trading and Principal Investments, beating the previous year handily and higher by 270 percent compared to $2.7 billion in the previous year.

Goldman’s Board of Directors also declared a quarterly cash dividend of 35 cents per common share. The dividend yield for Goldman Sachs shares is 0.7 percent. The dividend is payable on December 30, 2009 to common shareholders of record on December 2, 2009.

Since the beginning of 2009, Goldman shares have gained 117 percent, blowing out the 21.4 percent gain in the S&P 500 index (SPY). Goldman’s share price has been well above the 50-day moving average level since mid-July and the 200-day moving average since mid-April of this year.

Looking forward, CEO Blankfein stated in a release, “because the job market, and growth more generally, remain under stress, we continue to be focused on actively helping our clients in order to promote greater economic activity.”

Anworth Mortgage Cuts Quarterly Dividend

Anworth Mortgage Asset Corporation (ANH) announced last night after the closing bell that its Board of Directors has declared a 12.5 percent cut in the company’s quarterly common stock cash dividend. The new quarterly dividend on the company’s common stock is 28 cents per share, down from 32 cents per share for the last quarter.

Lloyd McAdams,  President and CEO of Anworth Mortgage said in an interview with Self Directed Investor this afternoon:

“There were lots of little things that all went in one direction. For example, we saw lower interest income due to resetting of ARMs at lower rates.  There were two extra days on the payment side. We paid interest on 92 days and received interest on 90 days. There were several other little things as well.”

McAdams also indicated the company maintained roughly the same leverage as the previous quarter.

The annualized dividend yield for Anworth shares is 14.5 percent as of today’s closing price of $7.69 per share.

The dividend is payable on November 19, 2009, to common stockholders of record at the close of business October 30, 2009. The ex-dividend date is October 28, 2009.

The board of directors also declared Anworth’s Series A Preferred Stock will pay a dividend of $0.539063 per share for the fourth quarter of 2009. The Series B Preferred Stock will also receive a dividend of $0.390625 per share for the fourth quarter of 2009. Both are payable on January 15, 2010 to holders of record on December 31, 2009. The dividend reflects the accrual from October 1, 2009 through December 31, 2009.

Since the beginning of 2009, Anworth’s share price appreciation and dividend (non-reinvested) have provided a 30 percent gain, beating the 19.5 percent gain in S&P 500 index year-to-date.  Technically, Anworth sits just at its 50-day moving average and well above the 200-day moving average price.

On July 29, Anworth reported second-quarter core earnings of $32.5 million or 31 cents per diluted share. Earnings for the first quarter of 2009 were $29.3 million or 30 cents per diluted share. At the end of June 30, Anworth’s Agency mortgage backed securities (MBS) portfolio was valued at $5.37 billion and allocated as follows: 20 percent adjustable-rate Agency MBS; 63 percent hybrid adjustable-rate Agency MBS; 17 percent fixed-rate Agency MBS; and less than 1 percent agency floating-rate collateralized mortgage obligations, or CMOs.

Anworth Mortgage is a mortgage real estate investment trust which invests primarily in securities guaranteed by the U.S. Government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Anworth generates income for distribution to shareholders primarily based on the difference between the yield on its mortgage assets and the cost of its borrowings.

Anworth is part of a sub-industry of the mortgage reit industry that invests primarily in agency-backed paper and is referred to as AmREITs. AmREITs take advantage of the spread inherent in the yield curve, borrowing short term at low-cost while investing in high-yielding, longer term mortgage securities issued by government sponsored enterprises. A major risk to the dividend payout is if the yield curve flattens.

Dividend payments have fluctuated greatly over the past few years ranging from quarterly dividends of 2 cents a share in 2006 to as high as 32 cents a share in July 2009.

Anworth Mortgage remains a solid income generator for the near term. The ARM-weighted portfolio of government backed securities also provides shareholders with a hedge against inflation as mortgage rates reset upward. High-yield investors fearful of economic uncertainty may want to consider Anworth Mortgage for their portfolio.

Anworth is expected to report third quarter earnings later this month.

For more information on AmREITs, read the following articles at Self Directed Investor.

How Much Longer Can AmREITs Fly High?
Wed, Sep 23, 11:51 AM ET

Are High Yielding aMREITs Ready to Run?
Fri, Jun 26, 2:49 PM ET

Full Disclosure: Long Anworth Mortgage.

ConocoPhillips Boosts Dividend and Plans to Sell Assets

ConocoPhillips (COP) announced last week that its Board of Directors declared a 6.4 percent increase in the company’s quarterly common stock cash dividend. The new quarterly dividend on the company’s common stock is 50 cents per share, up from 47 cents per share previously.

The annualized dividend yield for ConocoPhillips shares is 3.9 percent. ConocoPhillips has increased its dividend every year since the year 2002.

The dividend is payable on December 1, 2009, to stockholders of record at the close of business October 30, 2009. The ex-dividend date is October 28, 2009.

Since the beginning of 2009, Conoco shares have lost ground with a -2.3 percent change in share price for 2009. In contrast, the S&P 500 index is up 19.5 percent.

On July 29, ConocoPhillips reported second-quarter earnings of $1.3 billion or 87 cents per share, slightly better than the consensus estimate of 83 cents per share. Earnings per share for the quarter were well below the same quarter of the previous year of $3.50, due mainly to significantly lower petroleum prices in 2009.

ConocoPhillips intends to sell $10 billion of E&P and refining assets over the next two years to improve its financial position and strengthen its balance sheet. Proceeds will be used to reduce debt and are intended to increase the company’s return on capital.

ConocoPhillips is engaged in the exploration and production of oil and natural gas, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses. The company has six operating units including exploration and production representing 69 percent of earnings, refining and marketing (15%), LUKOIL Investment (11%), midstream (3%), chemicals (1%) and emerging businesses (1%).  As of December 31, 2008, the company had 8.08 billion barrels of oil equivalent proved reserves.

ConocoPhillips is a stable, globally integrated oil company paying a moderate yield. It is priced well below competitor valuations because of high-cost assets in the U.S. and Europe, and the company’s natural gas and refining businesses are low margin operations.

The company has scheduled its third-quarter earnings report for October 28, 2009.

Reynolds Raises Dividend, Pays 7.2% Yield

Reynolds American Incorporated (RAI) announced last week that its Board of Directors declared a 5.9 percent increase in the company’s quarterly cash dividend. The new quarterly dividend on the company’s common stock is 90 cents per share, up from 85 cents per share previously.

The annualized dividend yield for Reynolds shares is 7.2 percent. The dividend pay out ratio or POR for the company generally lands in the 70 percent range, a moderate POR level for long-term high yield dividend paying stocks.

The board declared the dividend payable on January 4, 2010 to shareholders of record on December 10, 2009. The ex-dividend date is December 8, 2009.

Since the beginning of 2009, Reynolds shares have gained 17.7 percent and slightly underperformed the 19.5 percent gain in the S&P 500 index.

The tobacco manufacturer has traded in a P/E range of 6 to 17 over the last five years. The current P/E ratio of 16.3 is at the higher end of the five year range. Reynolds American is a stable high yield dividend paying company at the high end of its historical valuation.

Reynolds has achieved significant cost savings in its merger with Brown & Williamson. Cost savings and new brand development have improved recent earnings for the company. The effect of the federal tobacco excise tax increase that went into effect in April 2009 has been discounted into the share price though sales volume could show further declines. Class-action suits are always a risk with tobacco manufacturers even though major industry-wide lawsuits have been resolved.

In July, Reynolds American reported results for the second quarter ending June 30, 2009. The company reported earnings of $1.29, up 4 percent compared to $1.24 reported in the comparable 2008 quarter. Earnings were 14 cents above expectations. Reynolds will web cast a conference call following the release of third-quarter 2009 financial results on Thursday, October 22, 2009. The call will begin at 10:30 a.m. Eastern Time.