It’s no exaggeration to call Prem Watsa the greatest investor in Canadian history.
Over the past decade, the chief executive of Fairfax Financial Holdings (TSX: FFH) has generated a compounded annual return of 10% per year, handily outpacing the S&P/TSX Composite Index. His exploits have earned him the nickname “Canada’s Warren Buffett”.
When looking for new income ideas, it never hurts to peek into the holdings of the world’s best investors, and this portfolio is loaded with reliable dividend payers. Here are Mr. Watsa’s top three income picks.
1. Johnson & Johnson
Johnson & Johnson (NYSE: JNJ) is the world’s sixth-largest consumer health-care company and owns many of the top over-the-counter brands, such as Tylenol, Motrin, and Benadryl. This health-care giant owns the No. 1 or No. 2 spot in many of the markets in which it competes. With this kind of domination, is it any surprise that Johnson & Johnson has managed to increase its dividend for 50 consecutive years?
How has the company been able to pull this off? Johnson & Johnson has one trait that separates it from thousands of other publicly traded companies: a nearly impenetrable economic moat.
Patents on drugs shut out all competition, giving the firm a near monopoly on many of its products. Also, because Johnson & Johnson is a name consumers trust — which is rather important when you’re putting something into your body — many are willing to pay a premium for the product even when there are cheaper alternatives.
Don’t be scared away by the stock’s measly 2.7% yield. Shareholders can likely count on that dividend to continue for years to come. Johnson & Johnson has $29.2 billion in cash on its balance sheet and last year the company generated an astonishing $17.4 billion in cash flow. The company also has a strong research pipeline with many potential new drugs for Alzheimer’s disease, stroke prevention, and antibiotic-resistant tuberculosis.
BCE has paid a dividend for over a century. Over the past decade, the company has nearly doubled its distribution to shareholders thanks to growing wireless demand. Today, BCE shares yield almost 5.1% — more than twice the going rate on a 10-year Government of Canada bond.
Shareholders can likely count on that dividend to continue for decades to come. The cost to replicate BCE’s telecom network would be in the tens of billions of dollars. This means the company can continue earning excess returns for shareholders year after year without the worry of rivals eating into margins.
Big pharma company Pfizer (NYSE: PFE) has been a steady dividend payer for decades. However, the stock has been abandoned by many income investors after management committed the cardinal sin of cutting its distribution in 2009 to fund its $68 billion acquisition of Wyeth.
For investors who are willing to forgive the company for its past mistakes, there is still a solid business here. The company’s payout currently clocks in at $0.26 per share for a yield of 3.4%, and the underlying business is generating a monster $17.8 billion in cash flow, ensuring that the dividend is well supported.
Investors are worried that the impact of patent expirations of some major drugs like Lipitor and Viagra will put pressure on profits. However, like Johnson & Johnson, customers have remained loyal to established brand-name drugs because these are names people trust. A robust research pipeline and a push into emerging markets could also reignite the stock.