This year has not been a year of slowing growth. It has been a year of losses. Not a good sign with a rate increase looming in the not-too-distant future. Those companies that will thrive when rates increase are also the ones loved by legendary investors like Warren Buffett and Peter Lynch. By that I mean high dividend-yielding stocks with a lot of free cash flow.
High Dividend Yielding Stocks with Lots of Free Cash Flow
It’s been a disappointing year for the stock market. And thanks to weak global economics and the much hyped rate hike by the Federal Reserve, it doesn’t appear as though the broader market is poised to resume their nascent rise anytime soon.
That doesn’t mean investors should shun stocks. It means investors need to be more discriminating in what they add to their portfolio. If you want to follow in the footsteps of legendary investors like Warren Buffett, Peter Lynch, and John Neff, then keep your eye out for high dividend-yielding stocks with lots of free cash flow, and strong fundamentals.
Free cash flow is the amount of “free cash,” or money left over after it pays for operations and necessary capital expenditures. The more money a company has in the bank, the greater the chances are it can sustain or increase its high dividend yield, buy back shares, expand its business, or pay down debt. And ultimately, increase shareholder value.
One of the most common ways to calculate the free cash flow yield is to take the amount of free cash flow the company generates per share and divide it by the share price. Another popular way (and the equation I am using) is to divide the company’s free cash flow by the market cap.
The higher the ratio, the more attractive the investment.
Top Dividend Stocks Loved by Buffett and Lynch
Ford Motor Co. (NYSE:F)
For the three months ended June 2015, Ford Motor Co. (NYSE:F) reported total free cash flow of $3.477 billion and free cash flow per share of $0.87. The company has a market cap of around $59.37 billion and is trading for around $14.70 per share. This puts the company’s free cash flow yield at around 16.90. (Source: ford.com, last accessed September 16, 2015.)
On top of that, Ford’s current annual dividend yield is 4.20%. Since 2012, the company has raised its annual dividend 200% from $0.20 per share to $0.60 per share in 2015.
PepsiCo, Inc. (NYSE:PEP)
PepsiCo, Inc. (NYSE:PEP) is a multi-billion dollar international brand known for “Pepsi,” “Lay’s,” “Mountain Dew,” “Gatorade,” and “Lipton.” For the second quarter ended June 30, 2015, the company reported total free cash flow of $1.93 billion and free cash flow per share of $1.29. The company has a market cap of $136.2 billion and is trading at $92.75 per share. As a result, PepsiCo has a free cash flow yield of 70.56. (Source: pepsico.com, last accessed September 16, 2015.)
It also provides an annual dividend of 3.05% or $2.81 per share. Another reason to like PepsiCo: it has raised its annual dividend for the last 43 consecutive years.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
A leading provider of integrated circuits and other semiconductor devices, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) reported second-quarter total free cash flow of $1.88 billion and free cash flow per share of $0.35. The company has a market cap of $107.12 billion and is trading hands at $20.66 per share. (Source: tmsc.com, last accessed September 16, 2015.)
Dividing the company’s second-quarter free cash flow by the market cap gives it a free cash flow yield of 56.97. Taiwan Semiconductor’s annual dividend yield is 3.53% or $0.72 per share.
AT&T, Inc. (NYSE:T)
Despite the Comcast ads mocking AT&T, Inc. (NYSE:T), the company is the industry-leading provider of wireline voice communications services in the U.S, plus 11 Latin American countries. In the three-month period ended June 30, 2015, the company reported free cash flow of $4.68 billion and free cash flow per share of $0.90. It has a market cap of $203.1 billion and you can buy one share for $33.05. This puts the company’s free cash flow yield at 43.40. (Source: att.com, last accessed September 16, 2015.)
AT&T provides an annual dividend of 5.72% or $1.88 per share. If history is any indicator, the future looks bright for high dividend-yielding investors looking for long-term growth opportunities. The company has been raising its annual dividend payout for the last 31 consecutive years.
Anheuser-Busch InBev SA/NV (NYSE:BUD)
Founded in 1366, Anheuser-Busch InBev SA/NV (NYSE:BUD) has a frothy portfolio of over 200 beer brands, including: Budweiser, Corona, Stella Artois, Becks, and Hoegaarden. The firm reported second-quarter free cash flow of $3.03 billion and free cash flow per share of $1.79. It has a market cap of $185 billion and is trading for $115.65 per share. This gives Anheuser-Busch a free cash flow yield of 61.05. (Source: ab-inbev.com, last accessed September 16, 2015.)
The company provides an annual dividend of 4.15 or $4.48 per share. And it has been increasing its annual dividend for the last five consecutive years.