Warren Buffett’s Best High-Yield Dividend Stocks – May 2016 Update

23: Goldman Sachs Group Inc (NYSE:GS)

Percent of Warren Buffett’s Portfolio: 1.3%
Dividend Yield: 1.7%   Forward P/E Ratio: 10.7x   (as of 5/16/16)
Sector: Financials   Industry: Investment Brokers
Dividend Growth Streak: 4 years

Goldman Sachs Group Inc (NYSE:GS) is arguably the most iconic bank on Wall Street. The company’s revenue mix is spread across equities (23%), fixed income / currencies / commodities (FICC – 22%), investment banking (21%), investment management (18%), and investing & lending (16%).

The company’s mix has gradually shifted away from FICC, which has come under regulatory pressure targeting opaque derivatives, in favor of relatively more stable businesses such as investment management and banking.

Warren Buffett’s history with Goldman Sachs dates back to the financial crisis. Berkshire Hathaway purchased $5 billion shares of preferred stock that paid a high-yield dividend of 10%.

Buffett was able to make this opportunistic deal because credit markets were freezing up, banks needed more capital, and fear was running high – especially surrounding Wall Street Banks.

Warren Buffett also received warrants that were later converted into roughly $2 billion of Goldman Sachs’ shares.

Buffett likely believed that Goldman Sachs would retain most of its franchise value after the financial crisis and felt confident that the government’s bailout of banks would keep his investment safe.

Goldman had long been known as the premier Wall Street destination, attracting the “best of the best” talent.

The company remains the number one ranked merger advisor and equity underwriting franchise and does investing banking business with over 8,000 clients across 100 countries. The firm clearly dominates the M&A market.

While banks are still contending with a challenging regulatory and macro environment today, Goldman Sachs Group Inc (NYSE:GS) will remain a key player in finance for decades to come.

24: Moody’s Corporation (NYSE:MCO)

Percent of Warren Buffett’s Portfolio: 1.9%
Dividend Yield: 1.6%   Forward P/E Ratio: 20.5x   (as of 5/16/16)
Sector: Financials   Industry: Miscellaneous Services
Dividend Growth Streak: 7 years

Moody’s Corporation (NYSE:MCO) is a leading provider of credit ratings, research, and risk analysis services. The company’s ratings and analysis track debt that covers over 11,000 corporate issuers, 21,000 public finance issuers, and more than 76,000 structured finance obligations.

The company’s ratings and research help investors better understand the risk behind fixed-income securities they are considering buying to help markets operate more efficiently.

Warren Buffett bought his first shares of Moody’s back in 2000 around the time that the company went public.

Warren Buffett probably liked Moody’s because of its duopoly position with Standard & Poor’s (regulations have limited the number of ratings agencies), strong pricing power, well-known brand, and essential services (e.g. a company can’t issue a bond without a ratings agency).

These factors enabled Moody’s to earn extraordinary returns on capital and develop a high level of trust with clients. Barriers to entry are very high.

Following the financial crisis, there was plenty of controversy surrounding rating agencies, which placed strong ratings on bonds backed by subprime mortgages that led to the housing crisis.

As a result, substantial damage was done to their brands and they came under increased government scrutiny.

However, ratings agencies have fared much better following the financial crisis than many investors expected.

Today’s low interest rate environment has led to significant bond issuances around the world, which has helped lift their businesses.

Moody’s Corporation (NYSE:MCO) continues to be a free cash flow machine and looks to remain a force in the global financial markets for a long time to come.

Read More: Analysis of S&P’s Parent, McGraw Hill