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In recent years, many investors have sought out the safety and income that bonds provide. This has been a winning strategy since most bond investors not only benefited from the yield, but also from capital gains. As bond yields dropped, the price of bonds rose and this has created gains for many bonds in the past couple of years. This bond strategy works in a delationary and fearful environment, and it could continue to work in the short-term. However, investors who believe it can continue to work indefinitely are ignoring history.

Over long periods of time, bonds have not always performed well. In times of inflation, bonds can be one of the worst places to invest. When inflation kicks in, rates rise and that causes bonds prices to drop, sometimes significantly. With many bonds now trading near record highs and offering historically low yields, there is downside risk that many investors are not recognizing. While the strength in bonds can continue, investors have to be careful to not become too complacent. Some of the world's best investors are cautioning against bonds. A recent Bloomberg article sums up Warren Buffett's warning for bond investors:

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely," Buffett wrote. "Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Solid companies with reasonable valuations are likely to outperform bonds over time. Many major corporations have cash-rich balance sheets, and current dividend payouts that already beat the yield offered by many bonds. This edge over bonds is likely to grow over time, because companies can raise prices if and when inflation strikes. Historically, solid companies have raised the dividend payments over time and that is another advantage dividend stocks have over bonds. I have never seen a bond issuer offer to pay more interest, but many dividend stocks end up with significantly higher payouts over the years. With that in mind, here are a few solid dividend stocks that Warren Buffett owns now:

ConocoPhillips (COP) explores for, and produces, natural gas and oil. This company also has significant refinery operations, and ConocoPhillips plans to spin off that division in the next few months. This could unlock value in this stock and the refinery spin off will be called "Phillips 66." At current levels, ConocoPhillips trades at a price to earnings ratio of about 8 times earnings. The dividend is approaching 4%, which is better than most bonds. The dividend is covered by earnings, nearly 3 times over, so it appears very safe and it could rise in the future. Buffett has purchased about 29.1 million shares of ConocoPhillips.

Here are some key points for COP:

  • Current share price: $72.25
  • The 52 week range is $58.65 to $81.80
  • Earnings estimates for 2011: $8.27 per share
  • Earnings estimates for 2012: $8.86 per share
  • Annual dividend: $2.64 per share which yields 3.7%

Johnson & Johnson (JNJ) makes many well-known consumer brands, which include Listerine, Motrin, Band-Aid, Reach, Splenda, Tylenol, Lubriderm, Sudafed and more. Many investors could say this is a boring stock, as it often barely budges, even on wild days for the rest of the market. However, some investors prefer this type of stability in a overly volatile market. In particular, bond investors might find this stock attractive because it has a solid product line that sells even in tough times. Plus, it has a yield that already beats many bonds, and the dividend is likely to rise over time. Buffett has purchased about 37.5 million shares of Johnson & Johnson.

Here are some key points for JNJ:

  • Current share price: $64.60
  • The 52 week range is $57.50 to $68.05
  • Earnings estimates for 2011: $5.11
  • Earnings estimates for 2012: $5.44
  • Annual dividend: $2.28 per share which yields 3.5%

General Dynamics (GD) designs and manufactures combat vehicles, weapons systems, ships, and more. It also makes the world-famous Gulfstream jets. Warren Buffett took a relatively new position in General Dynamics with a stake of about 3.1 million shares. With the U.S. expecting to cut the defense budget over the next couple of years, this company may not see the same growth it has had from weapons sales, but it should see continued growth with Gulfstream jets as the global economy improves. Emerging market countries are creating many new multi-millionaires and that is a growth area for private jet demand. The stock is trading at a reasonable price to earnings ratio of about 10 times earnings. With earnings coming in at about four times the dividend, there is plenty of room for increases, in the future. Any weakness in the stock is a solid buying opportunity for long-term income investors.

Here are some key points for GD:

  • Current share price: $70.30
  • The 52 week range is $53.95 to $78.27
  • Earnings estimates for 2011: $7.33 per share
  • Earnings estimates for 2012: $7.72 per share
  • Annual dividend: $1.88 per share which yields 2.7%

Intel Corporation (INTC) has a strong balance sheet and continues to innovate. Warren Buffett recently started a position of about 9.3 million shares in Intel. Historically, Mr. Buffett has not been a fan of tech stocks, as many new technologies come and go. However, Intel has a long-term history of success and stability which makes this stock ideal for income investors. This stock recently hit a new 52 week high, so it makes sense to wait for pullbacks and buy before the uptrend resumes.

Here are some key points for INTC:

  • Current share price: $26.69
  • The 52 week range is $19.16 to $27
  • Earnings estimates for 2011: $2.41 per share
  • Earnings estimates for 2012: $2.61 per share
  • Annual dividend: 84 cents per share which yields 3.1%

The Coca-Cola Company (KO) is the maker and distributor of many well-known brands such as Coke, Sprite, Vitamin Water, Minute Maid juices, Dasani water, and more. Coca Cola is one of Berkshire Hathaway's largest positions, with about 200 million shares currently held. This stock has the yield and stability that can compete with bonds, plus earnings are likely to grow as the company expands into many emerging market countries. Coca Cola shares recently hit a 52 week high, but it has pulled back recently, possibly due to issues over tainted orange juice imports from Brazil that have raised concerns. It makes sense to use pullbacks to buy shares and wait for higher prices, while collecting a solid dividend.

Here are some key points for KO:

  • Current share price: $67.94
  • The 52 week range is $61.29 to $71.77
  • Earnings estimates for 2011: $4.08 per share
  • Earnings estimates for 2012: $4.48 per share
  • Annual dividend: $1.88 per share which yields 2.7%

Procter & Gamble (PG) is a leading maker of consumer products such as Head & Shoulders, Olay, Pantene, Downy, Duracell, Tide, Braun, Gillette, and many more. This stock dropped after the company announced weaker than expected earnings. The company also decided to cut about 1,600 jobs, which is projected to produce savings of about $240 million per year. Mr. Buffett has purchased about 76.8 million shares of Procter & Gamble. This company has a product line that sells consistently, and a dividend yield that will rival most bonds. Long-term investors are likely to be rewarded by buying this stock on weakness. The stock is not likely to produce large gains, but it can provide stability and the income growth that bond investors seek.

Here are some key points for PG:

  • Current share price: $63.88
  • The 52 week range is $57.56 to $67.72
  • Earnings estimates for 2011: $4.04
  • Earnings estimates for 2012: $4.40
  • Annual dividend: $2.10 per share which yields 3.3%

Data is sourced from Yahoo Finance.

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor, and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Source: 6 Buffett Stocks For Income Investors