UTG - 2 Buffet-Style Dividend Stocks For Big Income

Summary

• Despite market action, Warren Buffett is a persistent buyer of quality at discounted prices.
• Markets don’t operate logically. Shying away from securities during weak markets will cost you dearly.
• Two Buffett-style picks to build your passive income with up to 7.6% yields.

Co-produced with "Hidden Opportunities"

We hear the phrase "recession-resistant stocks" a lot. What does it mean? These are stocks of companies whose products and services consumers will continue to purchase no matter the economic climate. In a slowing economy, consumers will generally still fill their prescriptions, seek medical care, practice good hygiene, and enjoy their favorite beverages and snacks. They'll also continue to pay for running water, electricity, and gas to heat their homes. These recession-resistant companies are generally financially healthy and highly profitable and can maintain profitability by raising prices without losing business. These companies have substantial competitive advantages that allow them to sustain reliable cash flows over time, regardless of what's happening in the economy.

Warren Buffett is a consistent buyer of high-quality businesses that are naturally recession-resistant. It doesn't matter if we are in a bull or bear market; the Oracle of Omaha is a buyer of discounted securities with robust business models.

Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price. - Warren Buffett in 2008

The Oracle of Omaha added that investors who buy good companies over time would see results 10, 20, and 30 years down the road. John Bogle, the founder of the Vanguard Group, has repeatedly advised investors to stay invested through short-term economic pressures.

Stay the course. Don't let these changes in the market, even the big ones [like the financial crisis] … change your mind and never, never, never be in or out of the market. Always be in at a certain level. - John Bogle in 2018

There will be market sell-offs, and there will be recessions. It is crucial to stay disciplined and stay focused on our long-term objectives. We have two high-quality recession-resistant picks with up to 7.6% yields to help you stay invested and collect safe income through the market mania.

Pick #1: UTG, Yield 7.6%

Did you know Warren Buffett is a long-term fan of the utility sector? Berkshire Hathaway (BRK.A) ( BRK.B ) has a 92% stake in Berkshire Hathaway Energy, a conglomerate that owns and operates regulated energy businesses serving customers and end-users across 28 U.S. states, Great Britain, and Canada.

While most businesses have high customer acquisition costs and compete with other service providers to win your business, it works very differently for utility companies. It is not like changing your brokerage firm or bank account - no one offers a free pizza to incentivize you to switch your electricity or natural gas provider. In fact, customers are charged a significant fee when they set up new accounts.

Mr. Buffett recognizes that utilities are vital services for humankind. They have recession-resistant revenue streams. In his 2015 letter to Berkshire's shareholders, the Oracle of Omaha said that utilities provide essential services. He described that electric and gas services are maintained without interruption during tough times when people need to cut back on their spending.

Buffett has his cash cow set from the dependability and inelasticity of the utility business. Remember that BHE (and BRK) don't pay dividends to shareholders so that they can retain all the proceeds for themselves.

I like utility and want to benefit directly from this cash-flow-rich industry. I am not a billionaire like Warren Buffett, but there are other ways to build a diversified utility portfolio for reliable income. Enter Reaves Utility Income ( UTG ), a closed-end fund with diversified access to North American utility companies. UTG comprises 44 companies, including some of the largest utility and telecom companies in the U.S. and Canada.

With UTG in your portfolio, you can have your own mini utility conglomerate generating reliable cash flow for you as BHE does for Warren Buffett. UTG is a monthly payer, distributing $0.19/share. This calculates to a 7.6% annualized yield. The distributions are yours to keep, spend, reinvest, and grow; just like how BHE retains its cash flows for growth at its discretion.

UTG is one of the finest CEFs available to investors. Since its inception in 2004, the fund has maintained steady Net Asset Value ('NAV') and distribution growth, that is 19 years of growing distributions!

UTG trades slightly below NAV, presenting an excellent opportunity to initiate/build your position while the market is trembling in fear from the Fed's transitory hawkishness. UTG is well-positioned to earn its distributions through recession pressures and fill our pockets with a large income. As long-term income investors, we have no problem getting paid to wait for Main Street to realize this.

In case you were wondering, UTG thoroughly earns its distributions and maintains a highly sustainable portfolio management strategy. YTD, the fund has earned its distributions through Long-Term Gains (27%) and Net Investment Income (73%). UTG does not utilize Return of Capital ('ROC') to make payments. Data Source: UTG 19(a)

Main Street is anxiously waiting with cash for the Fed to pivot. As income investors, we will make money through the anxiety of the markets by investing in defensive names. With UTG in your portfolio, you can grab that popcorn and watch the show while collecting big monthly payments.

Pick #2: BTI, Yield 6.8%

Tobacco is a pariah in modern society. Society frowns upon the habit, and regulators are waiting to penalize businesses. You may be inclined to shy away from industries where the regulators are watching like a hawk, but which company is immune to those pressures?

Think the mighty Facebook ( META ), Apple ( AAPL ), Amazon ( AMZN ), and Google ( GOOG ) (GOOGL) are smooth-sailing companies? Think again. Not counting the associated legal costs, the sum pending or paid by those four companies alone likely exceeded $3 billion in 2022. Popular names among Big Tech, Big Pharma, Big Oil, and Big Banks are the most fined companies globally . From fast food to social media, there is a wide range of adverse effects that corporate America has on human health and well-being.

Remember, people always have a choice not to use certain services if they don't want to.

Now I will get down off my soapbox and discuss an investment that most people shy away from due to the negative connotation associated with its business.

British American Tobacco ( BTI ) (which will be referred to as BAT in the rest of the article) is the largest tobacco company globally. The company operates a strong franchise and is the market leader in more than 55 countries.

The Lucky Strike and Camel manufacturer recently provided their outlook for FY2022 and expects sales to grow by low-to-mid-single digits in 2022 as product category performance has been solid.

BAT's Vuse retains a leading position in the U.S., and its value share rose to 39.3% as of September (up 6.8% YoY). BAT enjoys tailwinds in the U.S. market for new category products due to Vuse being the only FDA-approved product.

BAT launched a new device, "Hyper X2," and is rolling it out in 19 markets following a nationwide launch in Japan in October. This is a smaller, lighter device with a dedicated boost button for maximum taste satisfaction, and it has delivered very positive early results.

In Vapour, BAT is rolling out a new disposable product, "Vuse Go," which attained the #2 spot in the disposable segment in the early launch markets (the U.K. and France). This product is expected to be accretive to the BAT's ePod platform, which already enjoys market leadership and premium price positioning. Source

BAT added 1.1 million adult consumers of new products in Q3 to reach 21.5 million and is on track to hit £5 billion in New Category revenue by 2025 and 50 million adult consumers of new products by 2030.

BAT's new product category is growing and financially supported by its highly profitable and robust combustible business. Sales of cigarettes remained flat YTD (as of September), with U.S. and Asia-Pacific & Middle East ('APME') gains offset by declines in other regions. So don't be so quick to write off BAT's combustible tobacco business.

In its second-half pre-close trading update, BAT revealed their confidence in achieving £40 billion FCF over the next five years. Management also announced their top FCF priorities for 2023.

1) Growing dividend with modest payouts: BAT is prioritizing growing its dividend with a medium to long-term payout ratio target of 65%. Remember that the tobacco leader has been increasing its dividends annually since 2007.

BAT's current 54.45p quarterly dividend calculates to a 6.8% annualized yield in USD.

Note: BAT declares and pays dividends in British Pounds. U.S. investors will receive an amount that depends on the USD - GBP conversion rates.

The U.K. does not withhold taxes on dividends paid to foreign investors. U.S. investors holding BAT in taxable or tax-deferred accounts will not experience a withholding tax on the dividend payments.

2) Reduce Debt: For 2022, BAT projects its net debt to Adj EBITDA close to 3x, and the company has a 90% fixed-rate debt profile with an average maturity of over ten years. Management revealed their intent to use FCF towards debt reduction.

Other notable targets with FCF include bolt-on M&A to expand new product categories and continue share buybacks.

BAT is the cheapest global tobacco firm with the lowest payout ratio. This encourages investment in growing its new products and maintaining market leadership in the category.

BAT's global operations come with significant cost advantages and pricing power, which is instrumental in maintaining profit margins and dividend growth despite rising inflation pressures. Collect a 6.8 % yield from this recession-resistant business with attractive growth prospects from a growingly acceptable product line.

Conclusion

Bear markets are a passive income seeker's dream. When dividend-paying stocks plunge, yields rise with almost no change to the company's fundamentals. We seek those businesses and those securities where profit margins and dividend payability is protected despite changes to economic conditions.

Don't wait for the conditions to improve. The markets have a mind of their own and don't act logically.

if you wait for the robins, spring will be over - Warren Buffett in 2008

In other words, when the economy appears healthy again, stock prices will no longer be cheap. We have two big dividends to boost your passive income and get paid to wait for the markets to recover. These securities mimic what Warren Buffett looks for in his investments and exhibit recession-resistant capabilities. With up to 7.6% yields, you can increase your portfolio defense and build a robust passive income stream.

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