10 Best Dividend Stocks to Buy According to ‘English Warren Buffett’ Terry Smith

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In this article, we will discuss the 10 best dividend stocks to buy according to Terry Smith. If you want to skip our detailed analysis of Smith’s history and hedge fund performance, go directly to the 5 Best Dividend Stocks to Buy According to Terry Smith. 

Terry Smith is the founder and CEO of Fundsmith LP and a famous British fund manager. Previously he was the chief executive of Tullett Prebon and Collins Stewart. He is often referred to as “the English Warren Buffett” for his style of investing, which involves purchasing and holding shares in a comparatively small number of business organizations.

In 2010 Smith set up Fundsmith LP, an asset management company with head office in London. The business has one plan that applies across the Fundsmith Equity Fund and Fundsmith Emerging Equities Trust. Fundsmith is focused on providing preferable investment performance at a suitable cost. 

The firm’s 13F portfolio is valued at approximately $31.44 billion as of the end of the first quarter of 2021. The fund is up 13.1% so far in 2021 through June 30, while it gained 18.3% in 2020.

Among the notable holdings of Smith as of the first quarter of 2021 are Microsoft Corporation (NASDAQ: MSFT), Facebook, Inc. (NASDAQ: FB) and Visa Inc. (NYSE: V).

Microsoft Corporation (NASDAQ: MSFT), in which Terry Smith has a $2.84 billion stake, is gaining the attention of the Wall Street. On June 24, Microsoft Corporation (NASDAQ: MSFT) formally introduced the Windows 11 operating system, which will be made public by December this year. Microsoft Corporation (NASDAQ: MSFT) ranks 3rd in our list of the 30 Most Popular Stocks Among Hedge Funds.

Another notable stock in Smith’s portfolio is Facebook, Inc. (NASDAQ: FB). The investor owns a $1.89 billion stake in the company, representing 6.02% of its portfolio. On June 29, Facebook, Inc. (NASDAQ: FB) CEO Mark Zuckerberg launched Bulletin, the company’s newsletter-product competitor to Substack. It will mainly focus on permitting freelancers to reach new audiences and power their businesses. On June 22, Facebook, Inc. (NASDAQ: FB) announced that it is broadening its Shops feature to WhatsApp and Facebook Marketplace. The company will start customized ads for Shops, which can point shoppers toward organized collections. 

Another stock that Smith owns is Visa Inc. (NYSE: V), of which he owns 6.49 million shares. On June 7, Visa Inc. (NYSE: V) was upgraded to “Overweight” from “Neutral” at Piper Sandler with a price target of $260.00.

However, in this article our focus would be on dividend stocks in the Q1 portfolio of Terry Smith.

Investing in dividend stocks has become extremely important in the current age of financial volatility, which isn’t sparing even the smart money. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26, 2021, our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017, and they lost 13% through November 16. That’s why we believe hedge fund sentiment is a handy indicator that investors should consider. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Photo by Marga Santoso on Unsplash

With this context and industry outlook in mind, let’s start the list of the 10 best dividend stocks to buy according to Terry Smith.

Best Dividend Stocks to Buy According to Terry Smith

10. A. O. Smith Corporation (NYSE: AOS)

Smith’s Stake Value: $118,888,000
Percentage of Terry Smith’s 13F Portfolio: 0.37%
Dividend Yield: 1.5%
Number of Hedge Fund Holders: 24

A. O. Smith Corporation (NYSE: AOS) produces and retails residential and commercial gas and electric water heaters, burners, tanks, and water treatment chemicals. The company was incorporated in 1874 and is ranked tenth on the list of 10 best dividend stocks to buy according to Terry Smith. A. O. Smith Corporation (NYSE: AOS) has offered investors returns of 50.11% in the past 12 months.

Just like Microsoft (NASDAQ: MSFT), Facebook, Inc. (NASDAQ: FB), and Visa Inc. (NYSE: V), A. O. Smith Corporation (NYSE: AOS) is one of the best stocks to buy according to Terry Smith. On April 12, A. O. Smith declared a quarterly dividend of $0.26 per share, in line with the previous. In April, A. O. Smith Corporation (NYSE: AOS) was upgraded at Jefferies to “Buy” from “Hold,” with a price target of $325.

Fundsmith LLP is the biggest stakeholder of the company with 1.76 million shares, worth $118.89 million. This represents 0.37% of their portfolio. The fund increased its stake in A. O. Smith by 19% in the past few months. 

LRT Capital Management, in its first quarter 2021 investor letter, mentioned A. O. Smith Corporation (NYSE: AOS). Here is what LRT Capital Management has to say about A. O. Smith in its letter:

“A.O. Smith is the largest US manufacturer of residential and commercial water heaters, boilers and water treatment products. The company generates close to $3 billion in annual sales. The majority of the company’s business (73%) is done in North America, with the balance coming from China and India. Approximately 80% of demand is replacing existing heaters and 20% is tied to new construction. The company continues to benefit from a shift towards higher efficiency, but more expensive, tankless heaters.

A.O. Smith generates returns on invested capital in the high teens. The company uses its earnings to consistently grow its dividends and share repurchases. Over the past three years the company’s performance has been hurt by its exposure to China as its business there suffered due to the US-China trade war and poor execution. We believe the China business is back on track and the all-important US business is doing better than ever as housing demand heats up in the US. The company last reported earnings on Jan 28th and delivered 11% YoY sales growth with results beating both top and bottom line estimates.5 A.O. Smith also increased its share repurchase authorization.

We expect earnings to rise sharply over the coming year as the upswing in the US housing cycle translates to much higher earnings for the company. Shares are up 24.41% year-to-date. We believe the shares are attractive at 31.88x trailing and 24.37x forward earnings.”

9. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM)

Smith’s Stake Value: $13,955,000
Percentage of Terry Smith’s 13F Portfolio: 0.04%
Dividend Yield: 1.57%
Number of Hedge Fund Holders: 76

Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) produces and trades integrated circuits and superconductors. It was founded in 1987, and the company stands ninth on the list of 10 best dividend stocks to buy according to Terry Smith. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) stock has returned 109.04% to investors during the course of the past 12 months.

On June 21, Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) declared that it is looking forward to start moving in equipment at its Arizona chip fabrication plant in the middle of 2022. The Arizona fab will start mass production of ultra-modern 5nm chips in 2024. On June 22, Jim Kelleher, an analyst at Argus, initiated coverage on Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM), rating the stock as “Buy,” with a price target of $150. On April 5, Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) declared revenue for the first quarter of 2021. It posted revenue of $12.92 billion, up 25.4% YoY, beating the estimates by $240 million. 

Fundsmith LLP holds 117,981 shares in the firm worth $13.96 million. In the first quarter of 2021, 76 hedge funds in the database of Insider Monkey held stakes worth $10.87 billion in Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM), up from 72 the preceding quarter worth $11.84 billion. 

ClearBridge Investments, in their first quarter 2021 investor letter, mentioned Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM). Here is what the fund said:

“While we maintain high conviction in many of the emerging and secular growth names in the portfolio,– we continue to hold Taiwan Semiconductor, the world’s largest foundry. Semiconductor shortages, caused by a combination of years of capacity reductions, COVID-19 lockdowns and better than expected rebounds in industries like autos, will cause short-term revenue pressure but are allowing companies to exert pricing power as they race to replenish depleted inventories.”

8. Starbucks Corporation (NASDAQ: SBUX)

Smith’s Stake Value: $1,171,421,000
Percentage of Terry Smith’s 13F Portfolio: 3.72%
Dividend Yield: 1.59%
Number of Hedge Fund Holders: 61

Starbucks Corporation (NASDAQ: SBUX), with its subsidiaries, functions as a retailer of specialty coffee globally. The company was founded in 1971, and it ranks eighth on the list of 10 best dividend stocks to buy according to Terry Smith. Starbucks Corporation (NASDAQ: SBUX) has returned 52.52% to investors in the last 12 months.

Just like Microsoft (NASDAQ: MSFT), Facebook, Inc. (NASDAQ: FB), and Visa Inc. (NYSE: V), Starbucks Corporation (NASDAQ: SBUX) is one of the best stocks to buy according to Terry Smith. On June 23, Starbucks (NASDAQ: SBUX) declared a quarterly dividend of $0.45 per share, in line with the previous. On March 19, Starbucks (NASDAQ: SBUX) was upgraded at Wedbush to “Outperform” from “Neutral,” with a price target of $124.

The hedge fund chaired by Terry Smith is a leading shareholder in Starbucks Corporation (NASDAQ: SBUX) with 10.72 million shares worth $1.17 billion. 

Wedgewood Partnersin its first quarter 2021 investor letter, mentioned Starbucks (NASDAQ: SBUX). Here is what the fund said in its letter:

“As we have observed Starbucks through the unpredictable events of the past year, we believe all the things we liked about the Company’s competitive position before the pandemic have been turbocharged by the pandemic. We always have maintained the Company had no serious competition, anyway, and that in both large growth markets (U.S. and China), there was enormous fragmentation of share that would allow the Company to continue to expand through market expansion (especially in China) and through share gain versus small competitors. In fact, when we last discussed Starbucks, there was a lot of noise about competition in China from a newly established domestic competitor, Luckin Coffee, and that situation quickly dissolved into farce. In any case, had Luckin been a legitimate business, we had maintained that China was a massive market – and one in which coffee consumption was massively underpenetrated in comparison to other markets. We believed too that there was plenty of room for multiple large competitors to exploit.

The pandemic disaster over the past year truly highlights the Company’s financial strength in comparison to its small competitors, most of which struggled to survive, and many of which didn’t make it. While there is no perfect data, we have seen estimates from industry groups and restaurant distributors that as many as 15-20% of small, independent restaurants across the broad food and beverage industry may have closed permanently as a result of the pandemic, sadly. Starbucks not only survived due to its superior financial position; they also used its financial resources to invest in a variety of expanded or new capabilities, including the addition of drive-through capacity, new “walk-through” pick-up locations in urban areas, increased investment in technology to drive speed within the stores and drive-through lanes, and expansion of its loyalty program. These could have been viewed, prior to the pandemic, as a fairly big advantage in terms of convenience alone versus the Company’s small primary competitors. In the age of the pandemic, though, one might consider something like a drive-through an absolute necessity, as customers choose not to expose themselves to the interior of restaurants or to other people.” (Click here to read the full text)

7. Automatic Data Processing, Inc. (NASDAQ: ADP)

Smith’s Stake Value: $1,340,701,000
Percentage of Terry Smith’s 13F Portfolio: 4.26%
Dividend Yield: 1.88%
Number of Hedge Fund Holders: 42

Automatic Data Processing, Inc. (NASDAQ: ADP) provides cloud-based human finance management solutions. The company was founded in 1949 and is placed seventh on the list of 10 best dividend stocks to buy according to Terry Smith. Automatic Data Processing, Inc. (NASDAQ: ADP) shares have gained about 32.06% in value over the last 12 months.

On May 12, the company announced that it issued 1.70% senior unsecured notes due 2028, whose principal amount is $1 billion. The proceeds will be used for general corporate purposes and for share repurchases under ADP’s existing share repurchase program. On April 28, Automatic Data Processing (NASDAQ: ADP) declared revenue for the first quarter of 2021. The company posted revenue of $4.1 billion, up 1.5% YoY, beating the estimates by $20 million. Automatic Data Processing qualifies to be a member of the Dividend Aristocrats Index as it has increased dividend consecutively since past 44 years. On April 7, it declared a quarterly dividend of $0.93 per share, in line with the previous. 

The hedge fund run by Terry Smith owns 7.11 million shares in the company worth $1.34 billion, representing 4.26% of their investment portfolio. Fundsmith LLP has increased activity on Automatic Data Processing, Inc. (NASDAQ: ADP) stock by 1% in the past few months. 

Just like Microsoft (NASDAQ: MSFT), Facebook, Inc. (NASDAQ: FB), and Visa Inc. (NYSE: V), Automatic Data Processing, Inc. (NASDAQ: ADP) is one of the best stocks to buy according to Terry Smith.

Polen Capital Management, in their fourth-quarter 2020 investor letter, mentioned Automatic Data Processing, Inc. (NASDAQ: ADP). Here is what the fund said:

“For ADP, we detail our decision to sell our position in the third quarter letter. The very high levels of unemployment in the U.S. and extremely low interest rates have negatively impacted the business in the short term. At the same time, increasing competitive intensity in the human capital management industry is creating headwinds.”

6. The Home Depot, Inc. (NYSE: HD)

Smith’s Stake Value: $1,607,000
Percentage of Terry Smith’s 13F Portfolio: 0.001%
Dividend Yield: 2.1%
Number of Hedge Fund Holders: 68

The Home Depot, Inc. (NYSE: HD) is the world’s largest home makeover retailer. The company was incorporated in 1978 and is ranked sixth on the list of 10 best dividend stocks to buy according to Terry Smith. The Home Depot, Inc. (NYSE: HD) has offered investors returns of 25.46% over the course of the past 12 months.

On June 23, the company announced that it started new “Rent Online, Collect In Store” technology in about 1.3K rental locations. The new online technology permits customers to secure and rent equipment online for up to 30 days in advance. Customers will also have the facility to check the availability of equipment at various locations and make bookings on their phones or other mobile devices. On May 20, Home Depot declared a quarterly dividend of $1.65 per share, in line with the previous.

The Home Depot, Inc. (NYSE: HD) is a new arrival on Terry Smith’s portfolio, as his hedge fund bought about 5,265 shares of the company, worth $1.61 million. Ken Fisher’s Fisher Asset Management is the company’s most significant stakeholder, with 7.03 million shares worth $2.15 billion.

Just like Microsoft (NASDAQ: MSFT), Facebook, Inc. (NASDAQ: FB), and Visa Inc. (NYSE: V), The Home Depot, Inc. (NYSE: HD) is one of the best stocks to buy according to Terry Smith.

Ensemble Capital, in its first quarter 2021 investor letter, mentioned The Home Depot, Inc. (NYSE: HD). Here is what the investment management firm has to say about The Home Depot in its letter:

“Notable contributors to the Fund’s returns this quarter (included) Home Depot. Home Depot (8.9% weight in the Fund) continued to benefit from a red-hot housing and home improvement market, delivering record financial performance in 2020. As a high return on invested capital business, any step-up in growth results in considerable shareholder value creation. While 2021 comparable sales may not yield impressive headline results, we believe there are several secular tailwinds supporting continued housing investment, including millennials entering prime household formation/peak earnings years, relatively low interest rates, and government policies.

Home Depot (8.9% weight in the Fund): The big orange sign of Home Depot is a familiar sight for homeowners across the country. Despite the rise of Amazon, Home Depot has generated outstanding results for shareholders during the rise of eCommerce, even as Home Depot’s end market in housing suffered the worst collapse in a century. Over the last fifteen years, a period which began at the peak of the housing bubble, Home Depot’s stock has generated annual returns of 17% a year, outperforming the S&P 500 by approximately 7% a year.” (Click here to see the full text)

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Disclosure: None. 10 Best Dividend Stocks to Buy According to Terry Smith is originally published on Insider Monkey.