Let's say you are grasping with a market that's trying to discount a slowdown that's hanging over the second quarter like a shroud. What do we know about slowdowns?
Slowdowns tend to favor the stocks with bigger dividends because a slowdown presumes lower interest rates and lower interest rates mean stocks with outsized yields tend to prevail.
But which ones? And which ones have been vetted with a long-term prism? How about the highest-yielding stocks owned by Warren Buffett, a list that TheStreet.com compiled a week ago that seems to have real staying power and resonates with all, especially those I would describe as both the faithful and the fearful.
The now-well-viewed article took the Top 10 dividend payers and graded them by yield, with an ascending order:
10. Phillips 66 (PSX)
9. Wells Fargo (WFC)
8. Deere (DE)
7. IBM (IBM)
6. Procter & Gamble (PG)
5. General Motors (GM)
4. Coca-Cola (KO)
3. Suncor (SU)
2. National Oilwell Varco (NOV)
1. Verizon (VZ)
Now, yields tend to fluctuate in size, depending upon the price of the stock, of course. But I think that this list is a perfect way to approach uncertain times as the master has certainly weighed the pros and cons and doesn't like to trade, the in and out of ExxonMobil (XOM) being a rare reversal. We also don't know current positions because, as we know, reporting periods are quarterly so, in that sense, may not be a good judge. Buffett may have kicked out any and all of these stocks and we would not know it. That said, he doesn't pull the trigger idly. So the list is the best available dividend compilation to work from.
Without further ado, let me rank them subjectively, using my commonsense methodology for the times, as opposed to the rigid and rigorous form of ratings that TheStreet gives you, essentially an apples-to-apples digression of core components that may or may not work for you.
My first pick is, not coincidentally, a large holding for Action Alerts PLUS. I write coincidentally, because Wells Fargo is an extension, I believe, about everything that Buffett likes about a holding: an honest, well-run company that's best of breed in the space.
To me Wells, which currently yields 2.5%, represents the largest and most understandable bank. Wells controls 33% of the U.S. mortgage market, an astounding figure made possible by the degradation of the banking system in this country during the Great Recession and an aggressive attitude toward the bank to purchase whatever large assets that were available and bet that it could install its own rigorous banking systems to them and clean them up over time, as the expected recovery took hold. It was a brilliant strategy because the crisis allowed the bank to take a share that the Founding Fathers would have found wholly unacceptable, let alone the regulators a decade ago.
Given the way Wells works, which is like a retailer that cross-sells product, it is far less likely to fall prey to simple calculations regarding net interest margin, a fabulous modus operandi given that low rates will, per se, squeeze margins. So, despite the weakening employment picture, the accompanying lower rates will cause more individuals to seek mortgages and, in an environment of gradually loosened lending standards, the bank's in the sweet spot, something CEO and quintessential lender John Stumpf knows all too well. Anyone who's in the presence of Stumpf knows that after the pleasantries he wants to give you a mortgage, something that even the smallest of local bankers might not think to do. He thinks nationally, but acts locally and it's brilliant, although not as brilliant as he and the banks' decision to stay true to its knitting, helping it be the biggest bank not to be in the Justice Department's crosshairs.
Wells loves to raise its dividend and is a huge carnivore when it comes to eating stock. The latter's a real target and who can deny the need, given that the bank has 5.19 billion shares outstanding as of the last filing and it used to have 3.3 billion shares. I am sure it wants to get back to that level. Free of the regulators -- and we are almost there -- I have to believe that the share count could shrink rather fast, further boosting the earnings.
All in all, Wells may be the only bank you need in your portfolio because it is the best with the best prospects of growing even if rates remain low.
Next up would be Verizon, the phone company with its 4.45%. I am torn on Verizon because that yield insures that the stock's not going to go down much in a domestic slowdown. But the growth is severely constrained by the incredibly aggressive behavior of its competitors, notably Sprint (S) and T-Mobile (TMUS). The latter is fighting a guerilla war against both AT&T (T) and Sprint while the former is offering deals that, up front, seem too compelling to ignore. Neither competitor has the coverage that Verizon Wireless has. But coverage is growing for both even as the cost is insane to try to duplicate Verizon's footprint.
Verizon does have Fios, which is a terrific product. But it is going up against entrenched interests. It also is burdened by landlines, which only work at pipes for the Internet because, otherwise, the end of landline adoption, except for businesses, has arrived. You can only tolerate slow growth with small boosts in dividends for so long before you recognize that Verizon is little more than a high-yield bond with an increasing coupon, although that's nothing to sneeze at in this regime.
Next up, third best is General Motors. A slowdown here can be daunting for GM, which is making such amazing strides with its product. But it also may be accompanied by a pickup in the European market, where the losses had been horrendous and a possible rebound in China, the world's largest car market. GM's got a near-4% yield. It's also supposed to have an aggressive buyback, but a look at the share count certainly suggests that's not been a factor as of yet. My charitable trust owns the stocks because the company spews cash, something that dissidents want to be more aggressively returned to shareholders. That make sense in a robust economy, but right now that's not what we seem to have. So, a rainy-day orientation may stymie such a goal. Still, I expect a bigger dividend soon, so GM's stock might be a winner simply from that increase. In the meantime, it is upgrading its product line, including plowing money toward its moribund Cadillac brand, which would boost the entire gross margin profile of its lineup. But this company has a huge pension obligation and rates are too low to help it, which is why, if it were to get to $40, count me out of here.
Four and five would be the indistinguishable Coca-Cola and Procter & Gamble, with 3.2% and 3.13% yields respectively.
Both companies are challenged in so many ways, Procter by the high price of its goods and huge dollar exposure and Coca-Cola with a more hedged posture on currencies -- they are protected from a plummeting euro and yen, but at the mercy of the currencies of other countries -- but a main product that is widely perceived to have health risks.
Now, the former is not a Buffett-sponsored equity, so to speak. You don't hear much about it from the Oracle's mouth. But it seems energized to be able to rid itself of underperforming divisions -- witness the Duracell swap with Buffett for a big chunk of Buffett's outsized Procter position -- and there seem to be no more sacred cows at the Cincinnati powerhouse. I am drawn to that aspect of wholesale change as well as the raw costs that are coming down because of the plummeting price of energy. It just seems like a bargain here, 10% down from the high. Nevertheless, I can't make a near-term case for it given the currency and the fact that it seems to be in a price war with cheaper-currency Uniliver (UL) in multiple markets. Let me just say it, though, you can't go wrong owning P&G at this level with a concentrated management wanting to take back aisle space where it is No. 1 and cede aisle space where the margins are low.
I am totally intrigued by Coca-Cola here, not because of Coca-Cola itself, but because of the gigantic and growing stakes it has in Keurig Green Mountain (GMCR) and Monster Beverage (MNST). The former has a machine that the management of Coca-Cola believes will take the country by storm, a soda maker as good as Keurig is for coffee without the flimsiness of SodaStream's (SODA) machine. The price point could be an issue, but I am with Coca-Cola's management that this could be a big development. Meanwhile, Coke's partnership with Monster is going to allow Monster to get even bigger share than the plus-30% that it has and the company's been able to grow sales in double digits both through shrewd marketing and bountiful sales at gas station related convenience stores. Monster is now using Coca-Cola's worldwide distributorship, which should truly power its earnings. I am looking for big things from Monster. But I am not looking for big things from the flagship brand, regular or diet, because the health aspects are just too daunting.
We keep seeing declines in consumption in this country and that's hardly idle, even as emerging markets have good growth. Coca-Cola has created plenty of health additions to its line, but in the end it's a soda maker and despite bountiful margins you have to ask yourself what if international turns on the product like the domestic market has. That means little growth and OK dividend boosts. Still, it's an intriguing equity because of the zest for Monster and Keurig, which have very household names worldwide. Smart.
Phillips 66, with its 2.5% yield, intrigues and ranks sixth in my list of Top 10 Buffett dividend stocks. Phillips remains a play on the domestic glut of oil and how it can refine it for very big margins, because our oil is landlocked. But in the end, the company is a commodity business, which makes it hard for me to want to be in after this run, given that we could see a decline in production in this country very shortly. Now we just got estimates that showed we had our first sequential decline in production month to month, 123,000 barrels a day, but we are still 1.2 million barrels above last year at this time.
Now, two things could happen. One is that the president could allow for oil exports, which would crush the margins of PSX, or two, our domestic oil becomes scarcer because of a dramatic decline in drilling. The former seems unlikely, but the latter is a possibility, even as it might be a year from now. But I think this stock will discount that decline well in advance, which makes me a quarter-to-quarter guy on this one. You don't want to be that if you are on a commodity downside.
But that still makes it better than National Oilwell Varco and Suncor at 3.6% and 2.9% respectively. The former, the premier maker of oil field equipment, finds itself selling into a totally glutted market. It's the best of breed in a business where even the best of breed are having a hard time selling equipment. You have to believe in a V-shaped bottom for this company's products to become hot again and I simply don't subscribe to that theory. To me, National Oilwell is going to have to experience a real downsizing to maintain its current earnings profile and even its dividend. This is in some ways a dangerous stock to own because it swings so wildly. But if you think, as I do, that oil has seen the bottom, then it becomes a very intriguing value play that might be able to be the last man standing the oilfield equipment sector.
I regard Suncor as a high-cost producer that can't really be justified by Buffett except as, maybe, the most highly-levered oil business to a radical change in the price of crude. Suncor's heavenly in debt and has a position in the high-priced Athabasca oil sands project, something that you can get from Royal Dutch as you really want that exposure. This is a dicey stock and not one I can recommend to anyone unless you think oil's going back to $100 in a short period of time.
How about IBM at a 2.7% yield. Wow, this is a tough one because in some ways it might have the most upside of all of Buffett's dividend holdings. I say that because it has bought in a monster amount of stock, taking count to 995 million from 1.35 billion at last report, a phenomenally positive development. Plus, about 30% of its business is social, mobile, cloud, connectivity and cognitive analytics, all fast-growing businesses of which many think can be the savior here. But the other part of the business, the 70%, is a cash cow to fund other growth, buy back stock and increase the dividend, all of which are right up Buffett's alley.
Here's the issue. If it were to unleash that vast cash flow toward a forward acquisition that would take the fast-growing part of its business and get it closer to 50% right here right now, I think the stock goes to $200 rather quickly. But that's not what Buffett wants and I think management wants to please Buffett. Consider this share base like that of a football team. Buffett prefers a solid ground game and he's got the stadium half-filled. Only by taking to the air with a transformational acquisition would it get other investors to be intrigued to fill the venue, but it has no signs that it is willing to do that. Small acquisitions and increased research spending are the Buffett way. So, that's the IBM way.
That means IBM is trapped between reporting a fantastic quarter for a third of its business and a horrendous quarter for the rest. If you can wait through it, you might get to the Promised Land. But if you want to start betting that they've contained the bad IBM faster than most think, the time to buy it might actually be now.
Finally, the tenth position is Deere with its 2.7% yield. It is one I find to be on the dark side of the agriculture trade. I am anti-commodity and think that all commodities, including the ag complex, are on their way down. That means I have no time for Deere and if I wanted ag exposure, I would go with a blend like Dow (DOW) with a better yield. Deere is the best manufacturer and best of breed in the ag equipment business, but I have no desire to have exposure to that business and the dividend is not a help. Nevertheless, there is a price for everything and if Deere, which is now below where we heard Buffett had increased his stake, were to go back to below $80, where it was last fall, I could change my tune.
Overall, I personally find many of these stocks uninspiring. But in a world where rates are going to stay low and the one country that was leading the world out of recession now showing signs of flagging I can damn this selective portion of Buffett's portfolio with faint praise. In other words, there are some keepers, some would-be keepers and some stocks that I can just live without, not unlike the broader S&P 500 and its mosaic of stocks with decidedly mixed outlooks in what is turning to be a very tough 2015.