The Oracle of Omaha has struck his first deal since the stock market crash in March. Warren Buffett’s firm Berkshire Hathaway is spending around $10bn to acquire US firm Dominion Energy, which owns gas pipelines and storage facilities.
Dominion will be added to Mr Buffett’s existing holdings in the energy sector, which include UK regional electricity network operator Northern Powergrid.
At the Berkshire Hathaway AGM in May, Mr Buffett described his energy businesses as “a great way to stay real rich”. What he means is that these are reliable long-term assets that produce stable cash flows — ideal for dividend investors.
What should UK investors buy to emulate Mr Buffett’s strategy? I’ve found three FTSE 100 dividend stocks that I think fit the bill.
A solid 5.3% dividend yield
One attraction of Dominion’s gas pipelines and storage facilities is that they’ll be needed regardless of gas prices. You aren’t betting on commodity prices, which is always risky. In the FTSE 100, I think that National Grid (LSE: NG) provides a very similar opportunity for investors.
This business runs most of the UK’s gas and electricity transmission network, along with a utility business in the northeastern USA.
Although National Grid has to invest large amounts of capital in its network, its assets provide steady, regulated returns over many years. As you’d expect, this business has proved to be a good income stock.
National Grid’s dividend hasn’t been cut since 1996 and currently provides a yield of 5.3%. After this year’s widespread dividend cuts, not many other companies in the FTSE 100 offer this level of income. I think the shares are a safe buy for income investors.
Warren Buffett wanted to buy this company
Mr Buffett’s unsuccessful attempt to buy Unilever (LSE: ULVR) in 2017 highlighted his interest in this sector. Unilever owns a huge portfolio of everyday brands that are stocked in people’s kitchens and bathrooms all over the world.
Unilever shares are rarely cheap, but this business generates higher returns than National Grid and has an impressive record of long-term growth. So I’d be comfortable paying a little more for these shares.
That’s just as well, as the Unilever share price has bounced back strongly from March’s stock market crash. However, even with the shares trading at around £43, Unilever shares still offer a 3.4% dividend yield. I’d view this as a reasonable income, especially as Unilever’s dividend hasn’t been cut since 1966.
This stock is on my buy list
My final pick is FTSE 100 packaging group DS Smith (LSE: SMDS). Shares in the group have performed poorly this year, but I think this is the kind of stable long-term business Warren Buffett might buy.
DS Smith’s pre-tax profit rose by 5% to £368m during the last year, which ended on 30 April. The current year has had a difficult start due to Covid-19, but I think the company’s focus on consumer goods and internet retail should support medium-term growth.
I’ve owned these shares for a while and see them as a long-term income holding. I’m hoping to be able to buy more while they’re trading under 300p.
DS Smith’s dividend was cancelled last year, but broker forecasts suggest a payout of 14p for 2020/21. This would give a dividend yield of 5%. With the shares trading on just 10 times forecast earnings, I think now is a good time to buy.
The post Invest like Warren Buffett: 3 FTSE 100 dividend stocks I’d buy now appeared first on The Motley Fool UK.
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Roland Head owns shares of DS Smith. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and Unilever. The Motley Fool UK has recommended DS Smith and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and long January 2021 $200 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020