Monday, January 25, 2016

Warren Buffett's Secret To 50% Returns

Once a company reaches a certain size, significant growth is difficult to sustain. It is often easier achieve 10% growth in a $10 million company than growing a $10 billion dollar company 10%. Knowing this, savvy investors looking for growth will turn to small-cap stocks.

Consider what Warren Buffett has to deal with. His investments have grown so large that it is difficult to achieve the same growth rates as the early years. Being so large, Buffett is forced to take significant positions and only select from the best of large cap stocks. This dramatically limits his investment options.

In 1999 during Berkshire Hathaway's (BRK.A) shareholder meeting, Buffett stated that he could generate 50% returns if only he had less money to invest and focus on small companies. It's the smaller, faster growing companies that typically offer the highest returns.

Small caps tend to be thinly traded and often not closely followed by analysts. This provides opportunity for identifying stocks trading at a significant discount to their intrinsic value.

This week, I screened my dividend growth stocks database for select Small- and Mid-Cap stocks (using Morningstar's classificaion) with a yield at or above 3.5%, a dividend growth rate above 4.0% and a minimum of 10 consecutive years of dividend growth. The results are presented below:

Cracker Barrel Old Country Store (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States. The company has paid a cash dividend to shareholders every year since 1972 and has increased its dividend payments for 14 consecutive years. Yield: 3.6%

Raven Industries Inc. (RAVN) is an industrial manufacturer that provides electronic precision-agriculture products, reinforced plastic sheeting, electronics manufacturing services, specialty aeronautics, and sewn products. The company has paid a cash dividend to shareholders every year since 1972 and has increased its dividend payments for 29 consecutive years. Yield: 3.6%

Eaton Vance Corp. (EV) engages in the creation, marketing and management of investment funds in the US. EV also provides investment management and counseling services to institutions and individuals. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 35 consecutive years. Yield: 3.8%

Maxim Integrated Products, Inc. (MXIM) designs, develops and manufactures linear and mixed-signal integrated circuits used mainly in signal processing applications. The company has paid a cash dividend to shareholders every year since 2002 and has increased its dividend payments for 17 consecutive years. Yield: 3.8%

Nu Skin Enterprises Inc. (NUS) develops and distributes personal care products and nutritional supplements; it offers its products primarily under the Nu Skin and Pharmanex brand names. The company has paid a cash dividend to shareholders every year since 2001 and has increased its dividend payments for 14 consecutive years. Yield: 4.3%

Questar Corp (STR) is an integrated natural gas holding company that is engaged in gas transportation and storage, and retail gas distribution primarily in Utah. Its exploration and production unit was spun off in mid-2010. The company has paid a cash dividend to shareholders every year since 1935 and has increased its dividend payments for 36 consecutive years. Yield: 4.4%

Southside Bancshares Inc. (SBSI) owns Southside Bank, which primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations. The company has paid a cash dividend to shareholders every year since 1969 and has increased its dividend payments for 21 consecutive years. Yield: 4.5%

Meredith Corp. (MDP) publishes a suite of magazines and websites focused on food, parents and women (e.g. Better Homes and Gardens) and operates 17 local TV stations. The company has paid a cash dividend to shareholders every year since 1930 and has increased its dividend payments for 22 consecutive years. Yield: 4.5%

Westwood Holdings Inc. (WHG) provides investment advisory services to a wide range of institutional clients, and also provides trust and custodial services. The company has paid a cash dividend to shareholders every year since 2002 and has increased its dividend payments for 14 consecutive years. Yield: 5.1%

Omega Healthcare Investors Inc. (OHI) is a real estate investment trust (REIT) that invests in income-producing healthcare facilities, mainly long-term care facilities located in the United States. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 13 consecutive years. Yield: 6.8%

As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.

My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 250+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.

Full Disclosure: Long CBRL, RAVN, MDP, OHI, in one or more of my Dividend Growth portfolios. See a list of all my Dividend Growth Portfolio holdings here.
 
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