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

3: Sanofi SA (ADR) (NYSE:SNY)

Percent of Warren Buffett’s Portfolio: 0.1%
Dividend Yield: 4.2%   Forward P/E Ratio: 12.4x   (as of 5/16/16)
Sector: Medical   Industry: Pharma
Dividend Growth Streak: 22 years

Sanofi SA (ADR) (NYSE:SNY) is one of the biggest pharma companies in the world and focuses on therapeutic areas such as cardiovascular disease, thrombosis, oncology, metabolic diseases, central nervous system, internal medicine, and vaccines.

Some of the company well-known drugs are Ambien (sleep aid) and Plavix (combats cardiac plaque). The business is also very international with sales in emerging markets representing over 30% of total revenue.

Warren Buffett has owned shares of Sanofi since 2006 and is optimistic about the company’s franchise value and opportunities for long-term growth.

Drug pipelines are notoriously hard to predict, and Sanofi spends 14% of its revenue on research and development each year. Few companies can match the magnitude and pace of Sanofi’s spending on innovation and the intellectual property accumulated by the business.

The company’s investments have helped it launch more products over shorter periods of time to drive growth. From 2008-2012, Sanofi launched three new products. From 2012-2014, the company launched 10 new products.

As R&D spending rises through 2020, Sanofi SA (ADR) (NYSE:SNY)’s growth potential should increase as well.

4: International Business Machines Corp. (NYSE:IBM)

Percent of Warren Buffett’s Portfolio: 9.6%
Dividend Yield: 3.8%   Forward P/E Ratio: 10.9x   (as of 5/16/16)
Sector: Technology   Industry: Integrated Computer Systems
Dividend Growth Streak: 20 years

International Business Machines Corp. (NYSE:IBM) has been in business for more than 100 years and provides a wide variety of products and services, including IT infrastructure services, consulting, software, and server & storage hardware.

The company’s bread and butter over the years has been its mainframe computers, which are large, powerful computers that run major jobs such as managing the databases of credit card transaction of a bank.

Hardware only accounts for 10% of IBM’s sales, but many of IBM’s other revenue lines are supported by the installation and maintenance of mainframe computers.

Berkshire Hathaway began accumulating its stake in IBM during the second half of 2011, and the position has grown to be one of Buffett’s largest holdings at 8.5% of Berkshire Hathaway’s portfolio.

Warren Buffett has been familiar with IBM for a very long time. Buffett says he has read every annual report from IBM dating back to the early 1960s.

While Buffett has historically avoided technology companies due to their faster pace of change, IBM caught his eye for several reasons, beginning with the company’s strong reputation and customer relationships. Here is what Buffett had to say about his investment in IBM:

“The IT departments, you know, we’ve got dozens and dozens of IT departments at Berkshire. I don’t know how they run. I mean, but we went around and asked them and you find out that there’s – they very much get working hand in glove with suppliers. And that doesn’t mean things won’t change but it does mean that there’s a lot of continuity to it… Now, I would imagine if you’re in some country around the world and you’re developing your IT department, you’re probably going to feel more comfortable with IBM than with many companies.”

IBM’s reputation and long-standing operations have helped it amass an extremely impressive list of customers. Over 90 of the top 100 banks and all top 25 retailers in the U.S. run on IBM’s systems, and about half of all Fortune 100 companies outsource their IT operations to IBM.

It’s hard to imagine new entrants successfully taking away IBM’s business, especially considering the mission-critical nature of IBM’s products and services. It’s simply not worth the risk of switching to a less-proven vendor.

Warren Buffett was certainly aware of the changing technology landscape when he bought his initial stake in International Business Machines Corp. (NYSE:IBM), but he was likely comforted by the company’s long track record of successful evolution, steady free cash flow generation, strong brand recognition, and entrenchment with major customers.

Read More: 3 Reasons Buffett Blew It on IBM