As explained in an earlier YChart post, investing in wide-moat companies that have built up a big and defensible competitive advantage -- think Coca-Cola (KO), Google (GOOG), Starbucks (SBUX) -- has paid princely sums .The annualized return of the Morningstar Wide Moat Focus index has outpaced the S&P 500 by more than five percentage points since its 2002 launch.
Wide moat stocks tend to be big (as in globally dominant) established companies, and that leads to another tendency popular with income-seeking investors these days: they pay dividends. Eighteen of the 20 stocks in the Market Vectors Wide Moat ETF (MOAT), which tracks the Morningstar Wide Moat Index, pay a dividend. The ETF is a quarterly-rebalanced portfolio that owns the 20 cheapest wide moat stocks; cheapness is determined by Morningstar’s proprietary price/fair value analysis.
Berkshire Hathaway (BRK-B) is one of the dividend holdouts in Market Vectors Wide Moat’s current portfolio. While Warren Buffett recently offered a lengthy explanation in the annual shareholder letter why he doesn’t foresee paying a dividend, Berkshire Hathaway’s investment portfolio is a paean to dividend payers including Coca Cola, Wells Fargo (WFC), and Exxon-Mobil (XOM). The other Wide Moat dividend holdout is Express-Scripts (ESRX).
After creating a Watchlist of Market Vector Wide Moat’s current portfolio, sorting the 20 stocks by dividend yield presents an interesting list of stocks with above-average yields. Exelon (EXC) is at the top of the list with a 6.1% current dividend yield. But if you’re looking to pair wide moat and attractive dividend policy, Exelon is not an option. To preserve cash during a period of reduced power demand, Exelon recently announced a 41% dividend cut.
Intel (INTC) and Western Union (WU) are next on the list, with yields of 4.2% and 3.4% respectively. Those payouts are a sizable premium over the 2% yield on a 10-Year Treasury and sub-3% for high grade corporate debt. Moreover, their income streams have steadily increased.
Granted, both stocks have been major laggards over the past year, as seen in a stock chart.
More recently Western Union has shown signs of stabilizing; its 8.2% gain year-to-date only slightly trails the super-strong 9.7% gain for the S&P 500. Intel -- along with much of the Info Tech sector -- remains on the outs with a comparatively sluggish 3.2% gain year to date. But the fact that the chip maker is no longer moving down when the market is heading higher (as was the case in the second half of 2012) suggests the Street is warming to its value proposition, if just a smidge. Both Intel and Western Union have trailing 12-month PE ratios below 10. Their forward PE’s are 11, about a 30% discount to the market. That’s pretty cheap for some wide moat stand outs.