As any Cabot reader knows, we have great respect for Warren Buffett.
Buffett used part of his 2012 letter to shareholders to explain why Berkshire doesn’t pay a dividend.
His writing is crystal clear as usual.
I recommend you read it for yourself (it starts on page 19) but here’s the gist of it…
If a company is earning a 12% return on tangible capital, the value of the business will compound at 12% per year capital is retained to reinvest in future growth.
If a dividend is paid out, the business will compound at a far lower rate.
Further, an investor that has income needs can just sell 3.2% of her shares annually to “create a dividend.”
The best part is the investor’s stake in the business would be worth more over time despite selling 3.2% per year because the company would be compounding at a higher rate.
Finally, tax consequences provide another reason why “creating your own dividend” is superior to receiving dividends:
“Under the dividend program, all of the cash received by shareholders each year is taxed whereas the sell-off program results in tax on only the gain portion of the cash receipts.”
Warren Buffett’s logic is bulletproof.
I still like dividends.
There is something that just feels good about receiving cold hard cash in your brokerage account.
Today I’m going to share 3 dividend-paying stocks that look cheap and pay big dividends.
3 Little-Known Dividend-Paying Stocks for 2023
Jackson Financial (JXN)
Jackson Financial is a name that I’ve liked for a while.
It was spun off from Prudential PLC in 2021.
It is focused on the annuity market, an area of the market that is not exactly sexy. Nonetheless, people have been buying annuities for hundreds of years and will probably continue to do so.
The stock has performed well since its initial spin-off and is up ~60%. But it still looks attractive. It pays a 4.6% dividend and is only trading at 2x earnings. You read that right. 2x earnings.
Its peers, Brighthouse Financial (BHF) and Equitable Holding (EQH), are cheap too at 4x and 5.4x earnings, respectively. But Jackson would have to double its current share price to trade in line with these competitors.
Finally, management has been aggressively buying back stock and will continue to do so in 2023.
Garrett Motion (GTXAP)
Garrett Motion (GTXAP) is a special situation wrapped in a special situation. It is a spin-off from Honeywell (HON) and also a post-bankruptcy reorg.
It’s focused on manufacturing turbochargers which are needed to make internal combustion engines more fuel efficient. It generates gobs of cash. Despite a cyclically weak auto market due to the chip shortage (it will eventually recover), it’s trading at just 7x free cash flow.
My preferred way to play Garrett is by owning its preferred shares which trade under the ticker GTXAP.
These shares currently pay a 7.4% dividend and better yet, the preferred share will eventually convert to common shares over time (I think the common shares could double).
Unit Corporation (UNTC)
And last but not least, Unit Corporation.
Unit is a dirt-cheap energy company. It just paid out a $10 special dividend and plans to pay $2.50 quarterly dividends going forward (although the dividend will be variable).
This works out to an 18% yield.
Unit is gushing free cash flow yet trades at just 4.2x FCF and 3.6x on an EV/FCF basis.
Insiders own over 30% of shares outstanding, and the company is buying back stock aggressively. Finally, the company is exploring strategic alternatives and opportunistically selling assets.