3 Buffett-Style Dividend Stocks To Sink Your Teeth Into

Introduction

Don’t worry, I did not put Warren Buffett’s name in the title for clickbait reasons.

While I’m aware that some readers hate it when people use his name in titles, I’m dedicating this article to his investment strategy, especially as I am highlighting three Buffett-like plays that, I believe, are poised to deliver substantial future returns.

In this case, I have a very good reason to talk about Buffett, as Berkshire Hathaway (BRK.B) just held its annual shareholder meeting, which dominated the financial headlines.

In general, it’s fair to say that Buffett is a fascinating man, as he has dominated the financial industry for what seems to be countless decades.

Buffett was already a multi-billionaire when I wasn’t even born in 1995.

In fact, even in the 1980s, he made headlines that even most billionaires can only dream of. I added emphasis to the quote below:

Meanwhile, the median household income in 1985 was $27,735. Buffett wasn’t done with the 1980s, though. He would keep building his wealth at an incredible rate and by 1989 at age 59, Buffett was worth $3.6 billion — more than tripling $1 billion in just four years. – Yahoo Finance

Even in the modern economy, the Oracle from Omaha is still doing well, as Berkshire has returned 213% over the past ten years. While this is below the 225% return of the S&P 500, it is still an impressive performance for a company that competes with a tech-heavy benchmark.

Information technology and communication technologies account for almost 40% of the S&P 500, using State Street data!

Obviously, making excuses doesn’t help anyone. If you had bought the S&P 500 ten years ago, you would have done slightly better than Mr. Buffett and his team.

I would even bet you had outperformed a lot of well-paid hedge fund managers with homes in places like Naples, Florida.

Anyway, the point I’m getting to here is that Buffett could have been much more aggressive. He played it safe and still kept up with the market.

After all, he has been building a massive cash position.

Berkshire’s cash pile rose to a record $189 billion, including cash equivalents, from $167.6 billion at the end of last year. Followers of the company have been looking for clues about what Buffett might do with the cash hoard, from acquiring a new business to buying stocks to stepping up share repurchases. Berkshire doesn’t pay a dividend. – The Wall Street Journal

There are multiple reasons why Buffett has such a big cash pile. One of them is an absence of major deals – it’s also the most obvious reason.

As Berkshire’s annual meeting kicked off in Omaha on Saturday, Buffett said that “it’s a fair assumption” that its cash pile will hit $200 billion at end of this quarter. “We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money.” – Bloomberg

With that in mind, one of Buffett’s favorite valuation metrics is the ratio between the total U.S. stock market value and GDP. It’s somewhat of a P/E ratio for the entire country.

As we can see below, as of March 31, 2024, that indicator was at roughly 200%, 2.0 standard deviations above the long-term trend!

While I would never compare myself to Buffett, I’ve also written countless articles on a poor risk/reward for the market.

At the end of April, the market’s forward P/E ratio was 19.8x, which is indicative of poor returns in the years ahead.

This is why I am mainly investing in “value” stocks at the moment to improve my chances of beating the market in the 5-10 years ahead. Due to my view that inflation and rates are stuck in a “higher for longer” situation, I believe a bigger portion of the future total return will come from dividends.

With that said, in this article, I’ll present three stocks that I believe would be good Buffett-style picks.

What’s A Buffett-Like Stock?

Buffett owns a wide variety of companies. Among many other positions, he owns 100% of insurance giant GEICO, 100% of railroad titan BNSF, and major positions in Apple (AAPL), Occidental Petroleum (OXY), American Express (AXP), and Kraft Heinz (KHC).

So, what do these industrials, financials, consumer stocks, and technology companies have in common?

Essentially, there are four criteria that tend to apply to most of his investments.

• Favorable Long-Term Economic Characteristics: Buffett usually looks for businesses with a strong, sustainable competitive advantage (a wide moat!) to ensure their long-term economic success. He prefers companies that are leaders in their industries and have a history of stable and consistent performance.
• Competent and Honest Management: The management team is crucial for Buffett. He looks for experienced, capable leaders who are transparent and act in the best interest of the shareholders. He also looks for businesses that can eventually be run by “idiots,” as that will happen eventually.
• Attractive Valuation: Value is a cornerstone of Buffett’s strategy. He aims to buy stocks at a price that offers a margin of safety. Like the two points above, it’s hard to disagree with this one.
• Understandable Business: Buffett invests in industries he understands well. This allows him to make informed decisions about their long-term prospects. I believe understanding the industry, the business, and the factors moving a company’s stock price is key, as it also keeps us from making mistakes when volatility increases. Holding stocks in a bull market is easy. Holding stocks when the market goes south requires confidence(!).

Now, allow me to share three stocks that fit the bill. Of these three stocks, I own two and plan to add the other to my portfolio this year.

Three Buffett-Like Plays

Admittedly, although I just mentioned I’m looking for value, none of the stocks I’m presenting are “traditional” value plays. However, none of them are overvalued.

In fact, despite a lofty market valuation, all three offer attractive valuations and bring a great mix of growth and value to the table.

I’ll also provide links for further research, as I cannot give each company the attention it deserves in this article.

The companies are:

• Texas Pacific Land Corporation (TPL): a Permian-based oil and gas royalty play.
• Deere & Company (DE): the world’s largest agriculture machinery producer.
• Intercontinental Exchange (ICE): the owner of the NYSE and one of the fastest-growing financial companies in the world.

Texas Pacific Land Corporation

On February 23, I wrote an article explaining why I went big into Texas Pacific Land. In fact, I made it my largest investment.

The company’s business model is very straightforward. Founded in 1888, it owns land in the most valuable oil basin in the United States, the Permian.

It owns close to 870 thousand acres in the only U.S. basin capable of long-term growth.

This gives the company a lot of benefits, as it has surface rights, meaning it makes money on every activity on its land!

• It makes money when oil producers prepare new wells for future production.
• It makes money on oil and gas production.
• It makes money on water sales needed in the oil production process.
• It makes money from pipeline companies.
• It makes money from windmills, solar, and every other construction on its land.

Even better, it does all of this with minimal expenses!

As a result, it has a net income margin of more than 60%, only dragged down by its lower-margin water operations. Even so, it still beats almost every other S&P 500 company on profitability.

To put it in simpler terms, it’s like an oil and gas producer without the operating costs!

As a result, the company, which does not have a penny of gross debt, is trading at a “premium” – compared to the “average” oil and gas stock.

The company trades at a blended P/FCFE (free cash flow to equity) multiple of 30.4x, which is slightly below its long-term normalized FCFE multiple of 31.2x.

When adding that FCFE is expected to grow to $26.21 per share in 2026, we get a fair stock price north of $800, implying a 45% upside.

Personally, I believe the company will exceed $800, as I am extremely bullish on the energy sector, and because I believe Permian producers will use higher commodity prices to boost output, providing many tailwinds for the company.

Since 2004, TPL has returned more than 28% per year (not a typo)!

Although its common dividend yield is below 1%, the company uses special dividends during times of elevated oil prices to return cash to shareholders.

While many will fight me on the company’s management, I believe TPL is a “fool-proof” business. I like its moat, its valuation, and its future, as I expect tailwinds to emerge from higher oil prices, more demand for pipelines, higher water demand due to deeper wells, and an overall bullish picture for the nation’s oldest oil basin.

Intercontinental Exchange

ICE is a great way to make money in the financial sector.

As I wrote in a co-produced article in March, the company has the perfect business model for long-term wealth accumulation.

Since 2006 (including the Great Financial Crisis), the company has grown its adjusted EPS by 16% per year!

Growth is provided by aggressive M&A and a fantastic business model consisting of some of the world’s largest exchanges, next-gen mortgage technologies, and fixed-income services. Even better, more than half of the company’s revenues are recurring!

In its exchange segment, the company owns some of the world’s leading energy futures, agriculture futures, and other financial futures. It also owns the New York Stock Exchange.

In a world increasingly looking for hedging products and financial products, it has the right tools for investors, trades, and corporate treasury departments.

For example, in energy, it owns the ICE Brent contract and a wide range of other contracts that allow producers to effectively hedge various aspects of the energy value chain.

Moreover, in its emerging mortgage segment, it now owns a huge part of the modern mortgage “supply chain,” offering products from lead generation to trading and servicing.

This mostly recurring revenue segment generated $2.1 billion in pro format revenue last year, which is a tiny part of a market with a $14 billion size.

Shareholders benefit from consistently rising dividends (+7% in 1Q24) and buybacks whenever the company has reduced post-M&A debt.

Currently, ICE yields 1.4%. It has returned roughly 18% per year since December 2005.

The future looks bright as well, as analysts expect EPS growth to accelerate from 5% in 2024 to 11% and 10% in 2025 and 2026, respectively.

When adding that ICE trades at 22.8x earnings, below its long-term normalized P/E ratio of 24.6x, we get a potential annual return of 14% through 2026.

While these numbers are all subject to change, I believe that ICE will remain a fantastic compounder, which is why I’m looking to buy the stock this year.

Deere & Company

The company behind the John Deere tractor brand was one of the first holdings of my dividend growth portfolio, as I wanted to accomplish a few things:

• I wanted inflation protection.
• I wanted consistent dividend growth (with buybacks).
• I wanted exposure to the agriculture sector with a more favorable risk/reward than highly volatile fertilizer/chemical companies.
• I wanted a company with a clear edge over its peers in an industry that comes with somewhat low entry barriers.

While Deere is a cyclical company, it has a moat compared to most peers.

For example, it has a massive dealer network in key markets like the United States and Western Europe. It has massive brand recognition and decades of experience in farming automation and technologies.

The company, which spends close to 4% of its sales on R&D, aims to exploit what could be a >$150 billion addressable market by automating agriculture and construction machines to deliver efficiency gains when it matters most – especially in light of global food shortages and elevated inflation.

In addition to strong pricing power, the company has benefited from strong farm income since the pandemic, which has allowed it to grow its dividend to $1.47 per share per quarter – a 93% increase since 2020!

The company currently yields 1.5%. While that may not be spectacular, I need to note that strong capital gains offset past dividend hikes, which means investors enjoyed elevated total returns. It also has a focus on buybacks.

Over the past ten years, DE has bought back more than a fifth of its shares.

Currently, its stock price is a bit subdued, as agricultural commodities have been pressured by strong supply and poor global growth conditions (agriculture commodities tend to be cyclical).

The chart below compares the share price of Deere (the black line) to the price of CBOT corn. Please note that this chart does not imply that Deere should trade at $200-$220. CBOT corn is a commodity. DE is a value-adding company.

Even better, even in this environment, analyst expectations are quite upbeat.

The company, which has returned 14% annually since the end of 2003, is expected to grow its EPS to $29.41 in 2026, which is based on a 21% contraction in 2024, followed by a gradual recovery.

This implies a fair stock price of roughly $434, which is 8% above the current price. I expect these expectations to improve a lot once agriculture commodities start to gain upside momentum.

On a longer-term basis, I stick to a $600 price target, which I explained in an in-depth article written in February.

Takeaway

Investing like Buffett means prioritizing companies with strong competitive advantages, competent management, attractive valuations, and understandable business models.

While Buffett’s cash pile grows, I focus on value stocks positioned for long-term growth.

In this article, I presented three growth/value hybrids that I expect to perform very well in the future.

Texas Pacific Land Corporation, with its oil-rich land holdings, Intercontinental Exchange, boasting diverse financial services, and Deere & Company, a leader in agricultural machinery, exemplify Buffett-like picks.

Each embodies the principles of value, growth, and resilience, offering potential for substantial returns over the coming years.

In fact, since 2006, an equal-weighted portfolio of these three stocks has returned 22.4% per year, turning $10,000 into more than $404,000.

While past performance is no guarantee of future results, I’m very positive that these picks will continue to outperform the market, especially given the market’s overall lofty valuation.