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

31: Mastercard Inc (NYSE:MA)

Percent of Warren Buffett’s Portfolio: 0.4%
Dividend Yield: 0.8%   Forward P/E Ratio: 26.9x   (as of 5/16/16)
Sector: Business Services   Industry: Financial Transaction Services
Dividend Growth Streak: 5 years

Mastercard Inc (NYSE:MA) operates the second biggest payments network after Visa and enables business and consumers to use electronic payments instead of cash and checks.

The company makes money by charging fees to card issuers and acquirers for using its transaction processing services. MasterCard collects a fee based on the number and value of transactions completed using its branded cards.

Warren Buffett initiated his stake in MasterCard in early 2011 and was likely attracted to the company for several reasons, including its dominant market position.

First, MasterCard generates outstanding returns on invested capital, which is usually a sign of a strong economic moat. The business has earned at least a 40% return on invested capital in each of the last four years and maintains an operating margin in excess of 50%. Not surprisingly, MasterCard is an excellent free cash flow generator.

The company’s business model is appealing because the company essentially operates as a toll taker, collecting a fee every time a transaction is completed using one of its cards. Importantly, Mastercard Inc (NYSE:MA) does not have to worry about credit risk, which is taken on by the banks backing the credit card.

With over 80% of the world’s transactions still conducted using cash, there is presumably an extremely long runway for MasterCard’s credit cards to continue growing in use. As more transactions take place using its cards, the company’s profits will rise.

32: Visa Inc (NYSE:V)

Percent of Warren Buffett’s Portfolio: 0.6%
Dividend Yield: 0.7%   Forward P/E Ratio: 27.7x   (as of 5/16/16)
Sector: Business Services   Industry: Financial Transaction Services
Dividend Growth Streak: 8 years

Visa Inc (NYSE:V) is a global payments technology business that enables consumers and businesses to make electronic payments. The company’s processing network handles the authorization, clearing, and settlement of payment transactions around the globe.

Visa has over 300 million cards in circulation and is number one in credit card and debit card networks based on purchase volumes.

Visa makes money by collecting a fee every time one of its cards is used to complete a transaction. Unlike banks, Visa doesn’t issue cards or take on any credit risk. It just collects fees not unlike a toll taker.

Warren Buffett first bought Visa shares in late 2011. As a long-term investor, Warren Buffett and his team are thinking about what Visa looks like at least 10 years from now.

They are most likely encouraged by the fact that cash transactions still account for the far majority of total transactions around the world.

Just like MasterCard, the number of Visa credit and debit cards in circulation should rise over time as payments are increasingly made electronically.

More cards in circulation mean more transactions, driving earnings higher for Visa Inc (NYSE:V). So long as Visa’s processing network remains dominant, the company’s future looks bright.

Closing Thoughts

Studying Warren Buffett’s stock picks can give us new ideas for our own portfolios and also reinforces sound investing principles to follow.

By remaining focused on simple, high quality businesses trading at reasonable prices, we can construct a sound dividend portfolio that can deliver safe, growing dividend income for years to come.

Disclosure: None