>>> Better Buy: Coca-Cola vs. PepsiCo
By Stefon Walters
Sep 28, 2023
Coca-Cola's higher margins are a testament to its efficiency and pricing power.
PepsiCo's broad portfolio helps hedge against declining demand in the beverage market.
Both have increased their dividend annually for decades -- making them Dividend Kings.
Investors can't go wrong with either choice, but one stands out as the better long-term option.
When it comes to non-alcoholic beverage companies, there's Coca-Cola (KO) and PepsiCo (PEP) -- and then there's everyone else. In the U.S., the two account for around 71% of the carbonated soft drink market. The dominance of that duopoly makes them attractive investment opportunities.
For investors looking to invest in one of these companies, there's no "wrong" option to go with here. However, each company has its own unique strengths and focus areas. Let's see which offers a more compelling case for investors looking to choose one to add to their portfolio.
Coca-Cola's financials seem to be stronger
Coca-Cola is the market leader in non-alcoholic beverages, but one thing that may surprise people is just how much more revenue PepsiCo brings in. In Q2 2023, Coca-Cola made around $12 billion in revenue, more than $10 billion less than PepsiCo made.
Despite the gap in revenue, both companies are similar in net incomes, which is a testament to Coca-Cola's profit margins.
Higher profit margins are important because they give companies more financial flexibility. Higher margins generally come with more cash flow, which companies use for things like research and development, acquisitions, and paying dividends.
Coca-Cola can operate at higher margins largely because of its focus on beverages, operational efficiency, and the pricing power it has thanks to its strong brands. PepsiCo's margins aren't shabby by any means, but its broader business means it has more complexities to deal with, which can lower efficiency.
There's a difference in portfolio diversification
PepsiCo's revenue gap over Coca-Cola can be attributed to its larger portfolio that includes beverages, snacks, and nutrition products. Coca-Cola's portfolio only consists of beverages. Both have iconic brands, including, but not limited to, the following:
Coca-Cola: Coca-Cola, Sprite, Powerade, Dasani, and Minute Maid.
PepsiCo: Pepsi, Gatorade, Lay's, Doritos, and Aquafina.
PepsiCo's vast portfolio can help provide a cushion during times when beverage sales may lag or consumer preferences shift. Coca-Cola dominates the beverage segment, but PepsiCo's diverse portfolio allows it to take advantage of consumer trends across multiple categories.
A good example would be PepsiCo's introduction of products tailored to health-conscious consumers, among them Naked Juice for vegetable and fruit-based smoothies, whole grain breakfast options, and sugar-free, zero-calorie alternatives to traditional sodas.
Both companies have admirable dividends
Regarding dividends, Coca-Cola leads PepsiCo slightly. At their current share prices, Coca-Cola has a 3.2% yield compared to PepsiCo's 2.8%.
Coca-Cola has increased its dividend annually for 61 straight years while PepsiCo has a 50-year streak, so both are Dividend Kings. However, PepsiCo has been increasing its dividend by larger percentages in recent years. PepsiCo has boosted its payouts by 36% in the past five years compared to Coca-Cola's 18%.
Dividend yields fluctuate with stock price, so you don't want yield to be a determining factor in your investment thesis, but it's important nonetheless. Maybe more important, though, is the sustainability of the dividend.
Neither Coca-Cola nor PepsiCo is in danger of needing to cut their dividends, but it's worth noting how much lower Coca-Cola's 56% dividend payout ratio is than PepsiCo's 81%. Coca-Cola's lower payout ratio gives it more flexibility to reinvest in the business or potentially accelerate its dividend increases.
Which should investors go with?
For long-term investors, the better choice now seems to be Coca-Cola. The stock is more expensive, with a price-to-sales ratio of 5.6 compared to PepsiCo's 2.7, but it has the foundation to be a stable and high-yielding stock for the long haul.
Between its top-tier brand equity, impressive margins, and lucrative dividend, Coca-Cola seems to be the more appealing choice for investors looking for reliability and a shareholder-friendly company. It also passes the Warren Buffett test as it is one of his top holdings.
>>> Amcor plc (AMCR)
Number of Hedge Fund Holders: 22
Amcor plc (NYSE:AMCR) is a multinational packaging company that provides a wide range of packaging solutions and services. The company manufactures flexibles, rigid plastics, specialty cartons, and other packaging products. The company remained committed to its shareholder return in its fiscal Q3 2023, as it returned $745 million to shareholders through dividends and share repurchases. Its revenue for the quarter came in at $3.6 billion, declining by 1.1% from the same period last year.
One of the best packaging stocks, Amcor plc (NYSE:AMCR) has been growing its dividends consistently for the past 39 years. It currently pays a quarterly dividend of $0.1225 per share for a dividend yield of 4.86%, as of July 4.
At the end of March 31, 22 hedge funds in Insider Monkey's database owned stakes in Amcor plc (NYSE:AMCR), worth collectively over $244.5 million. With roughly 15 million shares, Polaris Capital Management is the company's leading stakeholder in Q1.
>>> Passive Income: 3 Dividend Kings Worth a Look
by Derek Lewis
July 7, 2023
Investors love dividends, as they provide a passive income stream and help cushion the impact of drawdowns in other positions.
And when seeking income, many investors turn to the Dividend Aristocrats, a group of S&P 500 companies that have upped their dividend payouts for a minimum of 25 consecutive years.
However, a step above is the elite Dividend Kings group, companies that have increased their dividend payouts for a minimum of 50 consecutive years.
Three members of the club – Johnson & Johnson JNJ, PepsiCo PEP, and Sysco SYY – all deserve consideration from those seeing reliable dividend payouts. Let’s take a closer look at each.
Johnson & Johnson
Headquartered in New Jersey, Johnson & Johnson is an American multinational corporation that develops medical devices, pharmaceuticals, and consumer packaged goods. Shares currently yield a solid 2.9% annually paired with a payout ratio sitting sustainably at 44% of earnings.
As we can see below, the company has shown a commitment to increasingly rewarding shareholders.
In addition, shares could entice value-focused investors, with the current 15.2X forward earnings multiple sitting beneath the 16.8X five-year median and the Zacks Medical sector average.
PepsiCo is an American multinational beverage, food, and snack corporation headquartered in New York. Shares yield 2.7% annually, with the company’s payout growing by an impressive 5.5% over the last five years.
PEP is a consistent earnings outperformer, exceeding earnings and revenue estimates in five consecutive quarters. Just in its latest release, the consumer staples titan delivered a 10% EPS beat and reported revenue 4% above expectations.
As we can see below, the company’s revenue growth is somewhat-seasonal but overall reflects stability.
Sysco markets and distributes a range of food and related products primarily to the food service or food-away-from-home industry. Shares currently yield 2.6% annually, with the payout growing by a solid 7.5% over the last five years.
It’s hard to ignore the company’s growth profile, further reflected by its Style Score of “B” for Growth. Estimates suggest nearly 25% earnings growth in its current fiscal year (FY23) on 12% higher revenues. And in FY24, current projections call for an additional 12% earnings growth paired with a 4% sales climb.
Targeting dividend-paying stocks is an excellent strategy that investors can deploy.
Dividends soften the blow from drawdowns in other positions, provide more than one way to reap a return from an investment, and allow maximum returns through dividend reinvestment.
And all three stocks above – Johnson & Johnson JNJ, PepsiCo PEP, and Sysco SYY – are Dividend Kings, upping their dividend payouts for a minimum of 50 consecutive years.
For those seeking a reliable income stream, all three deserve serious consideration.
NextEra Energy (NEE) - >>> With its commitment to sustainability, NextEra Energy (NYSE:NEE) has become one of the world’s most significant wind and solar energy providers. The company offers various services, including electricity generation, transmission, distribution, and storage.
NextEra Energy is also involved in research and development initiatives. Through its continued efforts to provide reliable and affordable renewable energy to customers around the globe, NextEra Energy has become an industry leader in delivering clean energy solutions.
NextEra’s huge portfolio and breadth of operations offer a certain level of stability. Plus, its experience in solar and wind projects gives it the edge over competitors looking to capitalize on the benefits of the Inflation Reduction Act.
Recently, NextEra Energy saw its stock nosedive following its earnings repot. The company’s EBITDA did not meet Wall Street projections in the company’s fourth quarter. Additionally, the head of its Florida Power & Light utility announcing his retirement. This was on top of a press release that had to be put out, to refute claims that the company had broken any campaign finance laws in Florida.
Sentiment perked up somewhat after NextEra declared a quarterly dividend of $0.4675/share, which is 10% higher than the previous payout of $0.4250. Shares are still down almost 10% this year, though.
Altogether, NextEra Energy is one of the largest utility companies in North America, offering offers investors an attractive yield of 2.5%. It also is well-positioned to take advantage of growth opportunities in the future. With its low-risk profile, NextEra Energy is an ideal option for investing in dividend-paying utility stocks.
>>> Southwest Airlines reinstates dividend, sees strong travel demand
December 7, 2022
(Reuters) -Southwest Airlines Co on Wednesday became the first major U.S. airline to reinstate its quarterly dividend, more than two years after suspending it in the wake of the coronavirus pandemic.
U.S. airlines have benefited from pent-up demand for leisure trips and a gradual return of lucrative business travel, helping them post strong quarterly earnings despite worries of an economic slowdown.
"Our fourth-quarter 2022 outlook remains strong, and we have a solid plan for 2023," Chief Executive Officer Bob Jordan said in a statement.
In a regulatory filing ahead of its investor day on Wednesday, Southwest said it was expecting "strong leisure revenue trends" to continue into the first quarter of next year, while business travel was expected to improve.
The carrier also trimmed its fourth-quarter fuel cost forecast by about 5 cents per gallon, compared with its previous estimate.
Southwest declared a third-quarter dividend of 18 cents per share, the same level at which it was prior to the pandemic. The dividend will be paid on Jan. 31.
The airline did not detail any stock buyback plans, which have been fiercely opposed by unions, who have asked U.S. airlines to focus on investing in their workers and fixing operational issues.
As part of the federal COVID-19 relief package, airlines had been prohibited from buying back their shares. The ban, however, expired on Sept. 30.
Winmark - >>> These 3 Dividend Payers Are Outpacing the S&P 500
By Collin Brantmeyer
Nov 9, 2022
Costco has a history of paying special cash dividends and beating the market.
PepsiCo recently became a Dividend King and has a current yield of 2.5%.
Winmark Corporation is set to pay its third special cash dividend in three years.
In a down year for the market, these three dividend stocks are topping the S&P 500.
It's no secret that investors are disappointed with their returns in 2022, with the S&P 500 down about 20% year to date. For investors looking to beat the market, there's evidence that consistent dividend-paying stocks are likelier to produce higher returns with lower volatility than non-dividend-paying stocks.
Therefore, it may be worth adding these three reliable dividend-paying stocks, which have outperformed the market in 2022, to your portfolio.
Most price-conscious consumers are familiar with Costco (COST -0.45%), the membership-only big-box retailer. Its stock is a favorite among long-term investors for its ability to beat the market and pay dividends consistently. Over the past five years, Costco stock is up 194%, compared to the S&P 500's 47%.
Despite a lackluster 2022 with a negative 14% return, Costco stock is still beating the S&P 500 by about 6%.
On the surface, Costco's quarterly dividend of $0.90, which represents a dividend yield of 0.76%, isn't overly impressive. However, the third-largest retailer in the world is known for paying a special cash dividend about every three years. Its last one came in 2020 at $10 per share.
Costco's balance sheet is also one of the strongest in the retail industry. As of Aug. 31, the company had more than $11 billion in cash and short-term investments, compared to just $6.48 billion in long-term debt. As a result, Costco has a rare negative net debt (cash and short-term investments minus long-term debt), which equates to roughly negative $4.5 billion. By comparison, Costco competitors Target and Walmart have a net debt of approximately $14 billion and $35 billion, respectively.
If Costco stock has a downside, it's unquestionably its valuation. Using the common valuation metric price-to-earnings (P/E) ratio, Costco's P/E ratio is roughly 37, whereas its competitors, Target and Walmart, are 18 and 28, respectively. Still, there's a reason Costco deserves a high valuation: Over the past three, five, and 10-year periods, Costco stock has handily beaten Target, Walmart, and the S&P 500.
Overall, Costco has proven to be one of the safest stocks an investor can own. With an unmatched balance sheet, it should continue paying dividends for years to come.
While PepsiCo's (PEP 0.64%) 4% year-to-date returns wouldn't be impressive in a bull market, the stock is outperforming the overall market by about 25% in 2022. The multinational food, snack, and beverage giant became a Dividend King -- an S&P 500 company that has paid and raised its dividend annually for at least 50 consecutive years -- earlier this year. At that time, it raised its quarterly dividend from $1.075 to $1.15 per common share. The stock's current dividend yield is about 2.5%, considerably higher than the S&P 500's 1.6% dividend yield.
Pepsico is a mature business, and its management focuses on returning cash to its shareholders. In 2022, it will pay cash dividends of $6.2 billion and repurchase $1.5 billion worth of shares, for a combined $7.7 billion.
Beyond PepsiCo's dividend and share repurchases, the company posted revenue of $58.3 billion during the first three quarters of 2022, which represented 7.7% growth year over year. Better yet, the company posted net income of $8.4 billion during that same time period, representing a 33% year-over-year increase from $6.3 billion.
These results show that PepsiCo's snacks and sugary beverages will always be in demand whether the economy is booming or struggling. And as a market leader in the food and beverage industry, PepsiCo stock makes an excellent addition to any investor's portfolio.
3. Winmark Corporation
Winmark Corporation (WINA) is a small-cap stock with a market capitalization just shy of $1 billion. Consumers are likely aware of its franchise-based retail companies that specialize in buying and selling used goods: Music Go Round, Once Upon a Child, Plato's Closet, Play It Again Sports, and Style Encore.
Its stock is essentially flat in 2022, which is still a commendable 20% higher than the S&P 500. Winmark currently pays a quarterly dividend of $0.70 per share, which represents a dividend yield of 1.12%. The company has a history of paying and raising its quarterly dividend each year, dating back to 2010, with the exception of one quarter in 2020 when the COVID lockdowns occurred in the U.S and Canada.
Like Costco, Winmark also has a history of paying special cash dividends. In fact, Winmark is paying $3 per share on Dec. 1, 2022 to all shareholders at the close of business on Nov. 9, 2022. Prior to this-year's special dividend, Winmark last paid a special dividend of $3 per share and $7.50 per share in 2020 and 2021, respectively.
Winmark is incentivized to open more franchises because the company's revenue comes from franchise fees and royalty fees. To open one, a franchisee must pay an initial franchise fee of about $25,000 in the United States and pay 4% to 5% of weekly gross sales.
As a result of Winmark's capital-light business model, the company generated $21.1 million in revenue and $10.3 in net income during its latest quarter. Those figures led to an impressive net profit margin -- net income divided by sales -- of 48%. For comparison, Costco had a net profit margin of 2.5% for its most recent quarterly earnings.
One negative for the otherwise glowing company is Winmark's slow franchise growth. Currently, the company has 1,291 franchises and only opened a net of 22 stores over the past 12 months, representing 1.7% growth. If the company can add more franchises at a faster pace, the stock should continue beating the S&P 500 -- just as it has done for years.
Are these dividend stocks buys?
In uncertain market conditions, dividend stocks can provide some comfort when you see payments hit your portfolio each quarter. Beyond that, if executives know that shareholders expect them to raise the stock's dividend each year, the company may take on less risk.
These three stocks, in particular, have established histories of beating the S&P 500 and should continue doing so -- all while paying you quarterly to hold them in your portfolio.
>>> 3 Dividend Stocks That Will Thrive in a Low-Carbon Future
By Daniel Foelber, Scott Levine, and Lee Samaha
Nov 3, 2022
NextEra Energy is finally hitting its stride.
Johnson Controls can help reduce carbon emissions for building owners and operators.
Brookfield Renewable operates a massive portfolio of renewable energy assets.
The energy transition offers immense opportunity for long-term investors.
The energy transition presents economic and environmental opportunities for the public and private sectors. Whether it's lowering emissions for legacy industries and existing processes or implementing new technologies that can support a lower carbon future, there is a heightened focus on sustainable growth and environmental, social, and governance investing.
NextEra Energy (NEE 1.17%), Johnson Controls International (JCI 5.74%), and Brookfield Renewable (BEP -0.20%) (BEPC 0.59%) are three quality dividend-paying companies with prospects that are aligned with the energy transition.
Improved profitability is the key for NextEra Energy
Daniel Foelber (NextEra Energy): Last Friday, NextEra Energy reported another excellent quarter. The regulated electric utility posted 13% growth in adjusted earnings per share (EPS) in the third quarter versus a year ago.
The company has two main business units. Florida Power & Light (FPL) is the legacy business that supports more than 12 million folks across Florida. That unit alone made over $1.07 billion in net income for the quarter. Meanwhile, NextEra Energy Resources (NEER) is the company's (mostly) renewable energy arm. It finances and operates utility-scale projects across North America. NEER's profitability has improved over the years. It made $722 million in adjusted earnings for the quarter.
NextEra Energy has grown to become the largest renewable energy operator in North America, mainly by using excess free cash flows from FPL to fund NEER's development. It's worth noting that FPL is also investing in solar to shift its energy mix away from natural gas. But NEER's improved profitability is an excellent sign that the business unit is becoming self-sufficient.
Over time, NEER's profitability should help NextEra Energy pay down debt and fund future dividend raises. Having paid and raised its dividend for 28 consecutive years, NextEra Energy is a Dividend Aristocrat with a proven track record of returning value to shareholders.
NextEra Energy is also a reliable business that is able to accurately forecast performance multiples years into the future. For the full year 2022, it is guiding for adjusted EPS of $2.80 to $2.90. For 2023, it expects adjusted EPS of $2.98 to $3.13 followed by $3.23 to $3.43 in 2024 and $3.45 to $3.70 in adjusted EPS in 2025. It also expects to grow its dividend by 10% per year through at least 2023 and 2024. NextEra Energy remains a well-rounded utility stock with a nice blend of growth and reliable passive income from its 2.3% dividend yield.
Johnson Controls International
Long-term growth prospects are excellent for Johnson Controls
Lee Samaha (Johnson Controls): Around 50% of carbon emissions come from the built environment, including 27% from building operations. Building owners and operators must invest in their properties to meet their net-zero emissions goals. That's the driving force behind the case for buying Johnson Controls stock.
The company has a multiyear opportunity to benefit from a cycle of retrofit investment by building owners. And the global pandemic has created an increased awareness of the need for adequately ventilated, healthy, clean buildings. Throw in the dramatically increased gains in building efficiency from using digital technology to manage structures' operations better, and it's not hard to see why building owners are likely to invest.
This speaks to an opportunity for Johnson Controls to grow sales of its heating, ventilation, air-conditioning, building controls, and fire & security products. Indeed, a quick look at revenue and order trends across its industry in 2022 confirms how vital the industry is now.
That said, Johnson Controls did disappoint investors earlier in the year. It's not that orders and backlog growth aren't firm; it's more the case that management was too optimistic over its ability to overcome supply chain pressures. For example, the company found it challenging to execute on its backlog of higher-margin building controls, given an undersupply of semiconductors.
Still, those supply chain pressures will likely ease, and the company's long-term prospects look good. Throw in a 2.8% dividend yield, and the stock is attractive for income-seeking investors.
Brookfield Renewable Corporation Inc.
A powerful path to pocketing some passive income
Scott Levine (Brookfield Renewable): While some companies dip their toes in low-carbon initiatives, Brookfield Renewable is fully immersed. The business includes more than 6,000 power-generating facilities in its portfolio of assets that represent a variety of renewable energy sources: solar, wind, hydropower, and energy storage.
Located around the globe, these assets account for about 24 gigawatts (GW) of generating capacity. For income investors interested in exposure to companies that will prosper from the growing push toward low-carbon power sources, Brookfield Renewable (with a forward dividend yield of 4.2%) is a worthy consideration.
Management's commitment to rewarding investors is undeniable. Since its start in 2000, Brookfield Renewable has increased its distribution to unitholders at a 6% compound annual rate, from $0.38 per unit in 2000 to $1.28 per unit in 2022.
And it's likely that the distribution will continue powering higher for the foreseeable future. Brookfield Renewable consistently articulates a target of annual distribution growth of 5% to 9%. Skeptics might question whether management's dedication to shareholders is jeopardizing the company's financial well being, but the fact that the company has an investment-grade credit rating of BBB+ from Fitch Ratings should allay those concerns.
Brookfield Renewable has a robust pipeline of projects -- about 62 GW of generating capacity -- to support future growth. From 2021 to 2026 alone, management expects to increase its portfolio by 3% to 5% from those projects in its pipeline, additions that will help the company to grow its funds from operations by about 10% per unit.
But growth isn't solely coming from organic sources. Brookfield recently demonstrated its interest in acquisitions with the announcement that it plans on partnering with Cameco to acquire Westinghouse Electric, a global leader in nuclear services.
>>> 3 Dividend Stocks That Prove That Slow But Steady Wins the Race
By Marc Rapport
Jul 22, 2022
Mid-America Apartment Communities and Prologis are the biggest property owners of their kinds.
Agree Realty is not as big but has a retail portfolio that is profitable and growing.
Agree Realty, Mid-America Apartment Communities, and Prologis have the past, present, and future to merit investor interest.
It's times like these that try investors' souls, or at least their portfolios. Brutal market conditions brought on by inflation and fears of recession have battered the best-laid plans of even conservative income investors like me.
But that doesn't mean I'm selling off those buy-and-holds that I believe will continue to provide reliable income and return to steady growth in share price, too, as the economy and the market eventually recovers.
My focus also will largely remain on real estate investment trusts (REITs), those pools of income-producing assets that tax law requires to pass at least 90% of their taxable income to shareholders.
Many of these dividend machines have proven the adage that slow but steady wins the race if the finish line means a nice flow of cash that supplements the other eggs in your retirement nest.
Here are three to consider. They're in different industries, and each has been in business since before the turn of the century (remember Y2K? That turn of the century).
They are retail REIT Agree Realty (ADC 0.17%), industrial REIT Prologis (PLD -0.29%), and residential REIT Mid-America Apartment Communities (MAA 0.12%).
The chart below shows that over the past 20 years, not only have these three stocks easily outperformed their peers, as reflected in the CRSP US REIT Index, but to a lesser degree even the broader market represented by the S&P 500.
No flash, but plenty of cash
They're hardly flashy outfits, these three. But two of them are the largest of their kind. Prologis has a portfolio of about a billion square feet of logistics warehouse space around the globe and is adding more with its announced acquisition of Duke Realty in a $26 billion megadeal.
In their recent quarterly earnings conference call, Prologis made it clear it sees continued strong demand for logistics warehouse space despite economic tailwinds turning to headwinds for this sector that grew red-hot during the pandemic.
Then there's Mid-America Apartments, with a portfolio of more than 280 apartment communities and 102,000 units that make it America's largest landlord. MAA's properties are nearly all in the Sunbelt and South, where demand and rents are rising, and this kind of business is particularly good.
Last but not least is Agree Realty. While much smaller than the other two, this owner of more than 1,500 shopping centers in 47 states has held steady through ups and downs, including the pandemic's wrath on retail real estate. While its 31 million square feet is minuscule compared with Prologis, Agree is also on the grow, reporting record quarterly investment in new properties last year and then again in the first quarter of this year.
Agreeable performances all around, with more to come
The market has indeed found Agree agreeable. The company's stock is up about 6% so far this year, while MAA and Prologis are both down a more-typical 27% or so. As for yield, Prologis is at about 2.7%, MAA is at about 3%, and Agree is at about 3.8%.
But long-term performance tells us a different story. Over the past 20 years, MAA would have grown a $10,000 stake to about $172,000, a compound annual growth rate (CAGR) in total return of 15%. For Agree, make that about $141,000 and 14%, and for Prologis, a still very respectable $93,000 or so and nearly 12%.
Each of these REITs provides a nice return and has the portfolio and seasoned management in place to continue proving that slow but steady can indeed be a very rewarding pace in this kind of buy-and-hold race.
>>> Vanguard High Dividend ETF - >>> Worried About Inflation? 1 Investment Strategy That Warren Buffett Likes
by Trevor Jennewine
In May 2021, Warren Buffett offered advice to investors at Berkshire Hathaway's annual meeting. For context, the stock market was soaring at the time -- the S&P 500 had climbed 48% in the previous 12 months -- fueled by unbridled enthusiasm brought on by stimulus checks, low interest rates, and the reopening of businesses in the wake of the pandemic. But Buffett's words were sobering.
He told his audience that many new investors were essentially gambling. Buffett also expressed his belief that index funds were a better option than individual stocks for the average person. Specifically, he recommended holding an index fund comprised of a diversified group of U.S. equities over a long time horizon.
Of course, the macroeconomic environment looks much different today. Rampant inflation and rising interest rates have caused the S&P 500 to crater, sending the benchmark index into bear market territory. But inflation hit a fresh 40-year high in May, so things may get worse before they get better. The S&P 500 is currently 23% off its high, but there have been six bear markets in the last 50 years, and the index dropped by over 45% on three of those occasions.
Building on Buffett's advice, here is one investment strategy that could help your portfolio weather the current downturn.
A diversified index of dividend stocks
Many dividend stocks outperform the market during downturns, especially those that regularly raise their payouts. The reason for that is simple. Only high-quality businesses generate enough cash to consistently pay shareholders a dividend that increases over time. If you reconcile that idea with Buffett's advice, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) looks like an attractive investment idea right now.
The Vanguard High Dividend Yield ETF comprises 443 U.S. stocks that span 10 market sectors, though 55% of the fund is allocated to consumer staples, energy, utilities, industrials, and healthcare, all of which tend to outperform in inflationary environments. Another 20% of the fund is invested in the financial sector, which tends to outperform in rising interest rate environments. To that end, the Vanguard High Dividend Yield ETF is currently just 14% off its high, easily outpacing the 23% decline in the broader S&P 500.
Also noteworthy, four of the index fund's top 10 positions are stocks Buffett owns through Berkshire Hathaway. That includes Chevron and Bank of America, which account for 19% of Berkshire's investment portfolio. Better yet, the Vanguard High Dividend Yield ETF bears an expense ratio of just 0.06%, meaning you would pay just $6 on a $10,000 portfolio, and its dividend yield currently sits at 2.72%, meaning a $10,000 portfolio would generate $272 in passive income each year.
As a caveat, while the Vanguard High Dividend Yield ETF has significantly outperformed the broader S&P 500 over the past year, especially when accounting for dividend payments, the S&P 500 typically wins in the long run. For instance, the S&P 500 has generated a total return of 65% over the past five years, while the Vanguard High Dividend Yield ETF has generated a total return of 47%.
However, you can't put a price on peace of mind. If your current portfolio composition has you worried about the impact of runaway inflation, consider starting a position in this index fund. I think Warren Buffett would like the idea.