Safest Income Stocks for 2013 (Final Part)

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In the 3-article series “Safest Income Stocks for 2013,” I laid out 6 stocks that I think are the safest income stocks for the next year. Each article covers two stocks in different industries, including quick service restaurants and technology, as well as fast moving consumer goods and tobacco. In this article, I will uncover two final safe stocks that could pay investors sustainable dividends on their growing business fundamentals in the next year. One is in the banking industry, and the other is in the wholesale/retail industry.

Wells Fargo (NYSE: WFC) is one of the most well managed banks in the US, with the stamp of confidence from the most successful investor of our time, Warren Buffett. Indeed, Buffett has considered Wells Fargo to be one of his long-term holdings. He started buying Wells Fargo when the whole banking industry was in crisis in 2008. Berkshire Hathaway came in to buy a 10% interest in the bank for only $290 million, which was valued at less than 5x after-tax earnings at that time.

Buffett wrote in 1990,

Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings. The exception was Wells Fargo, a superbly managed, high-return banking operation in which we increased our ownership to just under 10%, the most we can own without the approval of the Federal Reserve Board. About one-sixth of our position was bought in 1989, the rest in 1990.

As of September 2012, Wells Fargo was the second biggest position in Berkshire Hathaway’s portfolio, with more than 422.5 million shares and a total value of nearly $15 billion. 

In the last 10 years, Wells Fargo has paid consistent dividends, although the dividend payment was fluctuating. Trailing twelve months, it paid out $0.68 dividend per share, with a decent payout ratio of 21.3%. Wells Fargo has the best net interest margin compared to its peers, including Citigroup (NYSE: C) and Bank of America (NYSE: BAC). Wells Fargo’s net interest margin for the third quarter was 3.66%, much higher than Citigroup’s of 2.8% and Bank of America's 2.21%. Valuation-wise, Wells Fargo is trading at 10.8x P/E and 1.3x P/B. Bank of America seems to be more expensive with 31.3x P/E, but cheaper with a 0.6x P/B. Citigroup is valued at 16.2x earnings and 0.6x book value. Wells Fargo is paying the highest dividend yield among the three (2.3%), whereas Bank of America and Citigroup are paying 0.4% and 0.1%, respectively.

Costco (NASDAQ: COST) is the final stock in my list of 6 safest income stocks for 2013. It has quite an interesting business model. People pay for their memberships to get into Costco and buy merchandise for very low prices. In turn, Costco focuses on generating high sales volume with low prices and increasing inventory turnover. Charlie Munger is a big fan of Costco. When he was asked about his favorite company in addition to Berkshire Hathaway, he automatically mentioned Costco. He said about the long-term vision of Costco:

It has a frantic desire to serve customers a little better every year. When other companies find ways to save money, they turn it into profit. Sinegal passes it on to customers. It's almost a religious duty. He's sacrificing short-term profits for long-term success.

Costco has been generating consistently increasing profits and dividends. Its EPS has increased from $1.85 in fiscal 2004 to $3.89 in fiscal 2012. In the same period, Costco’s dividend payment has risen from $0.20 per share to $1.03 per share. In December, Costco paid special dividends of $7 per share, financed by newly issued senior notes of as much as $3 billion. I considered it an advantageous move for shareholders, as Costco had conservative capital structure. By issuing new debts, Costco could take advantage of the low interest rate to pay dividends.

Foolish Bottom Line

Wells Fargo and Costco have superb operations that are generating high margins and returns for shareholders. I think investors could sleep well at night betting on those stocks for a long run. This is the last article in the three articles covering 6 Safest Income Stocks for the next year. At the end of 2013, we will come back to see how well we will be doing with an income portfolio consisting of these 6 stocks.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , Costco Wholesale, and Wells Fargo & Company. Motley Fool newsletter services recommend Costco Wholesale and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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