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

29: Twenty-First Century Fox Inc (NASDAQ:FOXA)

Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 1.0%   Forward P/E Ratio: 17.3x   (as of 5/16/16)
Sector: Consumer Discretionary   Industry: Movie & TV Production & Distribution
Dividend Growth Streak: 1 year

Twenty-First Century Fox Inc (NASDAQ:FOXA) is a media conglomerate that owns all of the Fox-branded TV shows such as Fox Sports, Fox Business, and Fox News. The business also owns the 20^th Century Fox studio and a number of other TV stations and regional networks across the world.

Cable Networks Programming accounts for the bulk of Fox’s profits, generating 69% of company-wide EBITDA in fiscal year 2015. Filmed Entertainment was its next biggest contributor at 21% of EBITDA.

Fox was spun off from Rupert Murdoch’s News Corp publishing businesses in 2013. Its crown jewel was The Wall Street Journal.

Warren Buffett’s Berkshire Hathaway began accumulating shares of Twenty-First Century Fox at the end of 2014.

At the time of Buffett’s purchase, Fox was suffering from some poor ratings and offered Berkshire a reasonable valuation to get in at.

As a long-term investor, Warren Buffett doesn’t concern himself much with near-term events.

Instead, he likely viewed Fox as a company with strong brands and cable networks that could be enhanced, improving the company’s earnings power.

Additionally, a lot of Fox’s content is in valuable categories such as sports. Demand for premium content is rising as more distribution platforms such as Netflix become available around the world.

As this plays out, it seems likely that Fox could enjoy new ways to further monetize its content across the globe. In the meantime, Fox should continue generating predictable cash flows thanks to its diversified revenue mix and healthy retransmission fees.

Overall, Buffett seems to have been attracted to Twenty-First Century Fox Inc (NASDAQ:FOXA) because of its reasonable valuation, high-potential portfolio of content, and long-term opportunities to monetize its content domestically and internationally as distribution platforms continue growing.

30: Torchmark Corporation (NYSE:TMK)

Percent of Warren Buffett’s Portfolio: 0.3%
Dividend Yield: 1.0%   Forward P/E Ratio: 13.2x   (as of 5/16/16)
Sector: Financials   Industry: Life Insurance
Dividend Growth Streak: 11 years

Torchmark Corporation (NYSE:TMK) is a major provider of life and health insurance products. The company primarily distributes its insurance products through exclusive agency and direct response marketing channels and targets the middle-income market.

Like many other Berkshire Hathaway holdings, Torchmark is a low-cost operator in its market and earns very high underwriting margins in the industry. The business runs very lean and is able to spread its costs and risks over its base of more than $3 billion of annualized life and health premiums in force.

Warren Buffett’s stake in Torchmark dates back more than 15 years, and Buffett is no stranger to insurers. After all, one of his most legendary investments ever was Geico.

The insurance business model is an enticing one because insurers receive money upfront when they write new policies, but they don’t have to pay the money back until claims are made.

In the meantime, they can invest policy premiums in bonds and stocks to earn a return. As long as the insurance company is savvy and conservative when it comes to risk management, they can mint money.

Torchmark is indeed conservative and invests primarily in investment grade fixed-maturity assets. Since the company’s insurance underwriting margins are so strong, the company does not need to pursue an aggressive investment strategy.

The company’s free cash flows are also remarkably resilient. About 90% of Torchmark’s revenue each year is generated by policies that were sold in prior years, helping it generate cash in virtually any environment.

As a testament to its sturdiness, Torchmark generated a double-digit return on equity throughout the financial crisis.

Torchmark Corporation (NYSE:TMK) seems likely to remain in Berkshire Hathaway’s portfolio for a long time to come as it continues compounding its earnings.

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