The 4 (But Really 3) Dividend Aristocrats Warren Buffett Owns

I’ve seen this headline a few times Warren Buffett’s 4 Favorite Dividend Aristocrats. Just like everyone else I’m susceptible to the listicle and I clicked it. If you’re a Buffett follower you can probably guess the four. In case you can’t the four are:

  • Coca-Cola (KO)
  • AT&T (T)
  • Wal-Mart (WMT)
  • Procter & Gamble (PG)

But here’s the thing. Technically Berkshire-Hathaway still owns 52,477,678 shares of Procter & Gamble (PG), but it entered into a swap agreement with Procter & Gamble to sell its shares back to Procter & Gamble in exchange for Duracell. In the latest letter to shareholders, the Procter & Gamble (PG) stake is marked as held for sale.


From Berkshire-Hathaway 2015 Annual Letter. Click image to enlarge.
From Berkshire-Hathaway 2015 Annual Letter. Click image to enlarge.

So yeah Warren Buffet owns 4 of the Dividend Aristocrats, but one of them is in the process of being sold out of the portfolio.


Warren Buffett’s 4 Favorite Dividend Aristocrats (Sure Dividend)

Continued European Growth for Visa and MasterCard

Visa (V) and MasterCard (MA) are the two lowest yielding positions in our dividend growth portfolio, both yield under 1%. We think they will be the two companies to grow their dividends the fastest.

They both have low payout ratios that they can increase.

Neither needs to reinvest a lot of capital back into their business which leaves more to return to shareholders.

Both Visa and MasterCard have dominant payment networks that should allow them to generate excess returns on capital well into the future.

Electronic payment adoption and migration to Visa’s and MasterCard’s networks still has a lot of growth left in it. Even in developed markets like Europe.

From Barron’s.

On June 9, the second tranche of European payments regulation begins, creating a multiyear earnings catalyst for MasterCard and Visa. New merchant routing provisions will enable MasterCard and Visa to negotiate directly with retailers to process their domestic transactions for the first time. For context, regional networks in markets such as Cartes Bancaires (”CB”) in France and Girocard in Germany currently process nearly all domestic card transactions. Such networks dominate their local payments market by setting local payments routing rules, but upcoming European payments regulations replace these rules. Such presents an opportunity for MasterCard and Visa to accelerate European processed transaction growth.

Large retailers could lead share shift to Visa and MasterCard. Visa and MasterCard can entice international retailers to re-route domestic transaction processing away from local networks, such as CB and Girocard. After June 9, retailers with pan-European operations could further consolidate multi-country agreements with global networks such as Visa and MasterCard. This to negotiate better volume-based processing rates, organize joint marketing programs, and create a globally consistent consumer payment experience. For context, pan-European retailers represent a substantial portion of the overall French market, and 9 of the top 10 French retailers.

Also, Visa and MasterCard are far ahead of the local European networks in regards to tokenization. As payments move from physical cards to smartphones and digital wallets, the security tokenization offers is vital. If European retailers want to offer Apple Pay, which relies on tokenization, then they need to be on a payment network that can handle it.


MasterCard, Visa Set for European Boosts (Barron’s)

Human or Pigeon, Which is the Better Long-Term Investor?

In Thinking, Fast and Slow we learn that we have two systems of thinking. System 1, a quick thinking system built on heuristics and patterns. System 2, which is our deeper thinking rational system.

Because system 1 has to be quick it sees patterns when they aren’t there. As The Psy-Fi Blog explains.

The reason our pattern matching systems go wrong isn’t hard to figure out. In evolutionary terms the downside of missing something which is there – like a snake – is far higher than the downside of seeing something which isn’t. Reacting to 99 fake snakes is fine as long as you also react to the one real one. By and large it’s better to have a system that’s overly sensitive and makes mistakes than one that’s unresponsive to potential threats.

So seeing patterns where there aren’t any isn’t surprising. However, when you attach this tendency to a brain that’s evolved to seek meaning and explanations for everything, even where events are completely random, you get all sorts of unexpected consequences, like superstitious behavior, religious beliefs and stock market crashes.

Technical analysis is all about pattern recognition. But as the Psy-Fi blog goes on to point out through the research paper Noise Trading and Illusory Correlations in U.S. Equity Markets that the most popular chart patterns are just noise. They provide no real value. But humans are pattern seekers. We look for clues and patterns in the randomness.

Worse Than Rats & Pigeons

Jason Zweig points this out in his book Your Money & Your Brain. An experiment pits people against rats and pigeons. In the experiment, two lights could be flashed; one green the other red. The red light flashes 20% of the time. The green light flashes 80% of the time. The order of the flashing is completely random and the human test subjects are told this. The object of the experiment is to guess which colored light will flash next.

The optimal strategy is to guess green every time. You will be right 80% of the time. Rats and pigeons learn quickly to select green all the time. People, not so much. People still try to guess when the red light will flash. On average people guess green 4/5 times and red 1/5 times. Trying to guess when the red light will flash drops people’s accuracy down to 68%. People also tend to get worse at guessing the longer they play.

Unlike other animals, humans believe we’re smart enough to forecast the future even when we been explicitly told that it is unpredictable. In a profound evolutionary paradox, it’s precisely our higher intelligence that leads us to score lower on this kind of task than rats and pigeons. – Jason Zweig, Your Money & Your Brain

Play the Odds

The rats and pigeons learned to use the odds to their favor. They’ll guess wrong many times but in the long run, they learn to maximize their rewards by guessing green all the time. A similar situation pops up with investing.

People spend an extraordinary amount of time trying to guess the day-to-day fluctuations of individual stocks and indices. It is why triple leverage ETFs are able to exist. Guessing the day-to-day moves is close to a 50/50 bet. It is when you start looking at longer-term returns that the odds tilt heavily in your favor.

From A Wealth of Common Sense.
From A Wealth of Common Sense.

This is the pattern that individual investors should be seeing. It is the 80% green light. All that extra effort trying to guess daily, monthly, or yearly moves is the same as trying to guess when the red light will flash. It will only diminish your ability to maximize your long-term rewards.


Behavioral Bias 101: #1 Illusory Pattern Recognition (The Psy-Fi Blog)

Playing the Probabilities (A Wealth of Common Sense)

Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig

What I Wish I Wrote ~ Feb. 26, 2016

The Jewelry Effect. “there is a dizzying array of bass lures in variations of blues and purples even though bass cannot see those colors as anything other than gray”. (Above the Market)

Trading is hazardous to your wealth. (SSRN)

Why bear markets and corrections are good and why you should want them. (Newfound Research)

A look into Ken Fisher’s performance. (Meb Faber)

Why Gilead Sciences’ (GILD) is a bargain. (Institutional Investor)

How to become a successful dividend growth investor. (Dividend Mantra)

What you can learn from Bernie Madoff as an anti-model. (25iq)

A good story can always trump good research. (A Wealth of Common Sense)

Buybacks are not a cure all. Especially, if your main business is a melting ice cube like Outerwall’s (OUTR). (Base Hit Investing)

A big obstacle to saving more for retirement is lifestyle creep. How can you avoid it? (Castlebar Asset Management)

James Cash Penney’s (yes, that J.C. Penney) his thoughts on the golden rule after taking over the Golden Rule Stores and turning them into J.C. Penney. (Farnam Street)

A lot of time and human potential is wasted during commutes and our commutes keep getting longer. (Washington Post)

A little motivation for saving more and investing in dividend growth stocks. A full year traveling 9,275 miles, 4 provinces, 15 states,  and 7 countries. (The Dividend Guy Blog)


The 27 (Really 28) Stocks That Fit Buffett’s High-Quality Buy Criteria

From Barron’s and according to Credit Suisse these are the 27 companies (although the list is 28) that fit Warren Buffett’s high-quality investment criteria right now.

  • Hanesbrands (HBI )
  • Hasbro (HAS)
  • Carter’s (CRI)
  • Ross Stores (ROST)
  • Dollar General (DG)
  • Wal-Mart Stores (WMT)
  • CVS Health (CVS)
  • Walgreens Boots Alliance (WBA)
  • Aon (AON)
  • UnitedHealth Group (UNH)
  • Aetna (AET)
  • Cigna (CI)
  • Universal Health Services (UHS)
  • Johnson & Johnson (JNJ)
  • Bristol-Myers Squibb (BMY)
  • General Electric (GE)
  • Honeywell (HON)
  • General Dynamics (GD)
  • Snap-On (SNA)
  • Acuity Brands (AYI)
  • Carlisle Cos. (CSL)
  • MSC Industrial Direct (MSM)
  • Toro (TTC)
  • C.H. Robinson Worldwide (CHRW)
  • International Flavors & Fragrances (IFF)

The next three stand out because they are technology companies and Warren has repeatedly said tech companies are not in his circle of competency.

  • Oracle (ORCL)
  • CA (CA)
  • Amdocs (DOX)

Warren did buy IBM so maybe an investment in Oracle and its recurring revenue streams and high switching costs could be attractive. I still say it’s a stretch.


27 High-Quality Stocks Warren Buffett Might Buy (Barron’s)