Bill Gates’ High Conviction Dividend Growth Stocks Revisited

Bill Gates, the richest person in the world, made his fortune by founding one of the world’s largest software companies (Microsoft Corporation (NASDAQ:MSFT) of course), and stayed rich by investing wisely, divesting himself of his Microsoft position and investing that loot in a diversified portfolio. 54% of Gates’ portfolio is in his bridge partner Warren Buffett‘s Berkshire Hathaway, but Gates also owns a considerable amount of dividend stocks as well, which Sure Dividend detailed in late-July. Given many dividend stocks offer the right balance between capital preservation and capital appreciation, many of Gates’ portfolio stocks are suitable for non-billionaires as well.

In this article, we’ll revisit Gates’ top four dividend holdings and examine how they performed in the third quarter, as well as what elite investors like Buffett think about them.

We mention the portfolio of elite investors such as Warren Buffett because our research has shown that elite funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#4 Wal-Mart Stores, Inc. (NYSE:WMT)

– Elite Investors with Long Positions (as of June 30): 65
– Aggregate Value of Elite Investors’ Holdings (as of June 30): $8.52 billion
– Percentage of Shares Owned by Elite Investors (as of June 30): 3.7%

Wal-Mart is the 800-pound-gorilla in retail, having generated over $485 billion in revenue in its fiscal year 2015, which ended January 31, 2015. The company has a durable competitive advantage with its efficient supply chain and massive scale. Because it is so large, it can demand large discounts from its suppliers and pass the savings on to its customers to earn their loyalty.

Although shares of Wal-Mart were down by 7.96% in the third quarter, Wal-Mart is still a great value as it trades at a cheap forward P/E of 14 and pays an attractive dividend yield of 2.93%.

Bill Gates is a big believer in Wal-Mart, as he owns 11.6 million shares worth $823 million at the end of June. Gates’ Wal-Mart shares account for about 4.83% of his equity portfolio. Other investors long Wal-Mart include Richard S. Pzena’s Pzena Investment Management and D. E. Shaw.

#3 Waste Management, Inc. (NYSE:WM)

– Elite Investors with Long Positions (as of June 30): 31
– Aggregate Value of Elite Investors’ Holdings (as of June 30): $1.30 billion
– Percentage of Shares Owned by Elite Investors (as of June 30): 6.1%

Waste Management is the leader in waste management services in the United States. It has raised its dividend every year since 2003 and has a strong durable competitive advantage, with an established network of 260 landfills and 310 transfer stations. The company has grown its EPS by around 5% annually and has maintained its pace this year too.

Shares of Waste Management were up by 8.29% during the third quarter, greatly outperforming the market, as investors warmed up to the company’s reasonable valuation of 19.3 times forward earnings and dividend yield of 2.91%.

Bill Gates benefited from the stock’s strong performance, as he owns 18.63 million shares of Waste Management, worth $863 million at the end of June. Gates’ Waste Management shares make up 5.07% of his equity portfolio. Other elite investors long Waste Management include Cliff Asness‘ AQR Capital Management and David Harding’s Winton Capital Management.

#2 Caterpillar Inc. (NYSE:CAT)

– Elite Investors with Long Positions (as of June 30): 30
– Aggregate Value of Elite Investors’ Holdings (as of June 30): $1.36 billion
– Percentage of Shares Owned by Elite Investors (as of June 30): 2.7%

Caterpillar is a leader in construction and mining equipment. It has grown its dividend by an average of 12.2% annually for the last decade and hasn’t cut its dividend since 1982.

Shares were down by 22.2% during the third quarter, mainly because demand for Caterpillar’s energy and mining equipment was softer than expected due to weaker commodity prices. Because of lower demand, Caterpillar missed third quarter revenue expectations by $300 million and guided lower for its full fiscal year.

The good news for Caterpillar investors is the company’s dividend yield of 4.29% is safe. Even if Caterpillar’s earnings per share decline to $3.94 next year as analysts expect, the company will have more than enough to cover its dividends. If commodity prices continue their rebound, Caterpillar shares will do well.

Bill Gates owns 11.26 million shares of Caterpillar, worth $955.14 million at the end of June. Gates’ Caterpillar shares make up 5.61% of his equity portfolio. Other elite investors who own shares of Caterpillar include Matthew Hulsizer’s Peak6 Capital Management and Paul Tudor Jones’ Tudor Investment Corp.

#1 Canadian National Railway (USA) (NYSE:CNI)

– Elite Investors with Long Positions (as of June 30): 21
– Aggregate Value of Elite Investors’ Holdings (as of June 30): $1.45 billion
– Percentage of Shares Owned by Elite Investors (as of June 30): 3.1%

Canadian National Railway is the largest railroad in Canada and has a de-facto monopoly on rail traffic in many areas of the country.  The company has steadily delivered solid profits for its shareholders since its founding in 1918. The railroad performed admirably during the financial crisis, as earnings per share fell from $1.70 in 2007 to only $1.52 in 2009.

Canadian National Railway pays a dividend yield of 1.55% and trades at an attractive forward P/E of 17.49. Shares of the company fell by a modest 1.28% in the third quarter as the broader market sold off.

Gates owns 17.13 million shares of Canadian National Railway, worth $989 million at the end of June. Canadian National Railway make up 5.8% of Gates’ portfolio. Other elite investors long Canadian National Railway include Steve Cohen‘s Point72 Asset Management and Louis Bacon’s Moore Global Investments.

Disclosure: None