5 Buffett-Style Dividend Stocks to Own

Includes: JNJ, KO, MCD, PEP, PG
by: Hedgephone

Stock markets today are volatile, and many investors who don't want to own bonds here for somewhat obvious reasons (for one, Bill Gross is shorting them) may look to the following five high-yielding dividend payers which appear to be exceptional long term-values, based on cash flows and earnings. All five of the following pay out solid dividends to their investors, and are all owned by investment gurus who make a living by holding stocks for incredibly long periods of time.

Coca Cola (NYSE:KO), for example, makes up roughly 20% of Warren Buffett's stock holdings and both KO and Pepsi (NYSE:PEP) are top investments for value investment ace Donald Yacktman. If you are like me, and believe that the Russell 2000 is destined for a crash given the index fund's curreny overvalued and overbought nature, holding some "long hedges" against your IWM or TNA short position seems like a pretty good idea. IWM currently is extremely overbought with an RSI rating above 80 and a PE over 30. Owning some secure dividend paying stocks paid in spades in the 2008 downturn, and could once again save an investor's portfolio if a crash from these lofty levels is starting.

Coca Cola, as I mentioned, makes up roughly 20% of Buffett's portfolio of equities at Berkshire Hathaway (NYSE:BRK.B) and pays a roughly 3% yearly dividend. The company shares are a bit rich at the moment, trading for around 18 times last year's free cash flow and 15X analyst forward earnings estimates. Investors who want to capture the nice dividend yield on KO yet protect against the downside should consider a "Buy-Write" strategy on the stock and sell the May $65 calls against their stock position. This will provide a nice cushion if the bear comes roaring back at a time when almost everyone is bullish on stocks and the overall markets in general are quite pricey on a cyclically adjusted basis.

As you can see from the chart below, Coca Cola has outperformed the Russell in almost every way possible and has exhibited far less volatility in the bear market than the more overvalued small cap stock index.

Chart foriShares Russell 2000 Index (NYSEARCA:<a href='http://seekingalpha.com/symbol/IWM' title='iShares Russell 2000 ETF'>IWM</a>)
Pepsi is a bit cheaper than Coke on earnings and cash flows, although the company has little to offer in the way of tangible book value per share. Investors can take comfort knowing that PEP likely locked in some of the lowest interest rates on its debt in decades and will also be comforted by Pepsi's low 10X EV/EBITDA multiple.

Yacktman has a full 10.75% position in PEP, according to Yahoo Finance, and has owned the name through thick and thin, which helped his fund outperform 99% of his peers in 2008 and 2009. Pepsi is a cheap stock and a good company, with almost half of its revenues coming from the food business for a more diversified approach to this investment theme. Investors who are worried that PEP shares will be caught up in the overall bear market that may start shortly can sell the May $65 calls against their stock positions for an added margin of safety.

Chart forPepsico, Inc. (<a href='http://seekingalpha.com/symbol/PEP' title='PepsiCo Inc.'>PEP</a>)
Johnson and Johnson (NYSE:JNJ) is the ultimate staple stock, selling almost everything you can think of, including shampoos, soaps, toothbrushes, deodorant, Band-Aids, Tylenol, and much more. Johnson and Johnson is even cheaper than Coke and Pepsi and pays a solid 3.6% dividend yield. JNJ carries a PE ratio of just 12.5X earnings and an Enterprise Value to EBITDA ratio of only 7.8X. JNJ stock is fairly stable as far as price action, so investors should consider selling the May $60 call options against their position for added income and capital preservation needs.

Chart forJohnson & Johnson (<a href='http://seekingalpha.com/symbol/JNJ' title='Johnson & Johnson'>JNJ</a>)
McDonald's (NYSE:MCD) -- The Golden Arches may be a golden opportunity for "Buy-Write" investors trading at just 13.85 times forward earnings estimates. MCD is benefiting from global diversification and is a fairly recession-resistant model due to its low price points. McDonald's also offers a nice 3.2% dividend yield and investors can collect a nice premium by selling the May $65 call options against their stock positions. MCD, like PepsiCo, trades for just 10X EV/EBITDA which makes it cheap, although not quite as inexpensive as Johnson and Johnson. MCD managed to avoid a major crash during 2008 thanks in part to its Dollar Value Menu and the overall value proposition it offers its customers.

Chart forMcDonald
Procter and Gamble (NYSE:PG) is another big position for Buffett; the stock is remarkably inexpensive on a price to earnings and price to cash flow basis, although like PEP the company has little in the way of tangible book value. Investors who decide to buy PG for the long haul may want to sell the May $62.50 call options against their stock position for $.89 a contract. PG trades at a reasonable 10.93X EV/EBITDA and at 14.3X forward earnings.
Chart forProcter & Gamble Co. (<a href='http://seekingalpha.com/symbol/PG' title='The Procter & Gamble Company'>PG</a>)

Disclosure: I am long JNJ, KO, PEP, MCD.

Additional disclosure: I am short the Russell 2000 index