The Bill And Melinda Gates Foundation's Rock Solid Dividend Picks

 |  Includes: BP, MCD, PG, RSG, WM
by: Insider Monkey

By Matt Doiron

Contrary to the beliefs of many investors and market watchers, 13F filings can in fact be useful tools for mom-and-pop investors. We've proven this by showing that the most popular small cap stocks among hedge funds- as determined from these filings- outperform the S&P 500 by an average of 18 percentage points per year (learn more about our small cap strategy). Putting theory into practice, we developed a portfolio last summer which has since returned 33 percentage points above the market index.

We can also take advantage of our database by tracking individual filers. The Bill and Melinda Gates Foundation includes a trust which manages stocks with an eye for the long term, with few changes in position sizes from quarter to quarter. We've noticed that the trust's portfolio includes a number of stocks which income investors might find interesting and potentially worth taking a closer look at. Read on for our quick take on the five stocks from the trust's portfolio which pay the highest dividend yields, see the Gates Foundation's full filing on the SEC's website, or check out its picks over time.

The trust owned nearly $1 billion worth of McDonald's (NYSE:MCD) according to the filing, or 9.9 million shares. Revenue and earnings were up only slightly last quarter compared to the second quarter of 2012, so at a trailing earnings multiple if 17 we would likely balk at buying McDonald's on a value basis. The dividend yield is a bit above 3%, however (and likely sustainable given the quick service restaurant's blue chip status). With a beta of 0.2 McDonald's also features little exposure to market conditions and could be a defensive pick.

The Gates Foundation has a particular interest in waste management companies, including Waste Management (NYSE:WM) itself; the filing discloses ownership of almost 19 million shares of that stock. The company's profits have been up, going by recent reports, but revenue growth has been limited and so high earnings growth is probably not sustainable. Yet markets are pricing in significant improvements in the business with a trailing P/E of 23. It does offer a high yield, at 3.5%, though the payout ratio at current dividend levels and financial conditions is nearly 80%.

According to the filing, the trust had 7.1 million shares of BP (NYSE:BP) in its portfolio at the end of June. With market sentiment still running strongly against the company over 3 years after the Deepwater Horizon disaster, the stock is cheap in terms of forward earnings estimates (the P/E on this basis is 8) and compared to current dividend payments (the annual yield is 5.2%). There is certainly a good deal of dependence on oil prices, but overall we think that BP looks good from a value or income perspective even compared to its peers.

Procter & Gamble (NYSE:PG) was another of the Gates Foundation's dividend picks with the 13F disclosing ownership of 1.5 million shares. The $215 billion market cap personal products company is a somewhat popular defensive pick, with a beta of 0.3 and an increase in the quarterly dividend earlier this year bringing the yield to 3%. The trailing and forward P/Es are 20 and 17 respectively, and sales grew only 2% in the second quarter of 2013 versus a year earlier- hardly the performance we'd like to see at that valuation.

Finishing up our list of the trust's dividend stocks is another waste management company, Republic Services (NYSE:RSG). Profits dropped in its most recent quarter compared to the same period in the previous year, though Wall Street analysts expect the company to recover next year; based on their forecasts for 2014, the forward earnings multiple is 17. Republic Services has been steadily increasing its dividend over the last ten years, and the current yield is 3.1%. However, we would want to wait for actual improvement in the financials before considering buying.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.