After being continuously bombarded by weak data out of Europe, the stock market seems ready to crack again. For the month of June, we got a relatively weak consumer confidence number of 62, which was a tad below expectations but nothing to be upset over.
Bad news in Europe is still driving up the purchasing power of the US dollar and driving our treasuries into deflation territory. While this is extremely bad news for commodity-producing companies and banks (who rely on the yield curve for much of their interest-based income), most companies should weather this storm just fine.
Warren Buffett is, of course, notorious for sniffing out companies that are poised for long-term growth. Since I'm strongly advocating the purchase of reliable dividend stocks right now over ultra-low yield treasuries and bonds (or risky stocks that are doing terribly), I think that market conditions are ripe for everyday investors to start more long-term DRIP positions. I emphasize DRIP (a dividend reinvestment program) because of the power of compounding over a multi-year timeframe - more on that here. Here are 6 Buffett stocks that are good buys for the current situation:
1.) Coca-Cola (KO)
This is a natural pick for DRIP portfolios, but I must emphasize that it is still worth buying despite some hype on the stock. Revenue has been increasing consistently, earnings have been improving on a linear positive trend, and the dividend has a lot of room to increase. The yield of 2.7% looks a little bit low, but if you factor in total return (~5% annually over the last 10 years) you have a huge winner.
2.) Sanofi-Aventis (SNY)
I think that this French pharmaceutical giant has been unfairly punished by its geographic location. For the most part, healthcare companies will not be affected by the conditions of the financial markets although they can lose money through the foreign exchange market (they have to convert their earnings back into Euros). Large pharmaceutical companies like Sanofi do have some rough patches due to patent expirations, but for the most part they've been able to reward dividend investors with sustained yields. Sanofi's payout ratio is just under 50%, which allows plenty of room for dividend growth too.
3.) Visa (V)
Visa (and the other "financial transaction companies") are not like the rest of the sector. These companies are not being hounded by the government over mortgage loans or suffering from a poor market for investment banking. Visa's business grows so long as financial transactions around the world continue. The only problem with the stock is the yield, which is incredibly low right now (~.7%). This doesn't mean the stock isn't worth looking at, because the dividend itself has been recently issued and set to expand drastically in coming years (the payout ratio for shares was only 12% in 2011). A DRIP program may accelerate your gains if the company grows its dividends in subsequent years.
4.) American Express (AXP)
Like Visa, the dividend on shares of AXP is very low (~1.4%). The real growth will come from the shares themselves, which are poised to explode, especially if the US recovery accelerates. American Express is virtually identical to Visa based on analysts' expectations on future earnings growth, so these shares may be preferable due to the higher yield. Visa shares have also rallied much harder than American Express (~68% gains on V relative to ~16% gains on AXP in the last year) which implies that American Express may play catch-up based on fundamental value.
5.) Kraft Foods (KFT)
Kraft, and other food companies, might have substantially improved margins with a strong dollar. Since food companies take raw ingredients (food commodities) and sell refined products at set prices, companies like Kraft can operate at lower costs and still make the same amount of money from sales. The yield on KFT is currently 3%, and although the company has been stingy on dividend hikes we could see the stock move up if earnings improve from low commodity costs. It's a good DRIP candidate for an environment like this.
6.) Wal-Mart (WMT)
Wal-Mart is a low-risk stock with a 2.3% yield (set to increase). The current economic climate is ideal for Wal-Mart, which really makes it the ideal candidate for a DRIP. Oil is extremely low (reducing shipping costs and encouraging consumers to drive more often), and the population is still conservative about spending (Wal-Mart caters to this demographic with discounts and heavy volume).
Overall, an equally split portfolio with these 6 stocks would yield ~2.5% and offer substantial appreciation potential over a multi-year timeframe (especially with V and AXP)