My strategy when I’m buying dividend stocks is straightforward. It involves buying profitable businesses and using the earnings they generate to buy others.
Over time, I hope to use this strategy to build a substantial asset base. For now, I’m concentrating on finding stocks to buy that will generate cash that I can use to reinvest elsewhere.
Three stocks are on my radar to buy in September. Each of them generates significant free cash that it returns to shareholders, providing me with capital to deploy elsewhere.
Legal & General
First on my list is Legal & General (LSE:LGEN). At current prices, the stock has an eye-catching dividend yield of 7.1%.
It’s difficult for insurance companies to differentiate themselves. But I think that the company’s history gives it something that makes it stand out over the competition.
For obvious reasons, it’s important to customers that a life insurer will be around for a long time. Having been around since 1836, Legal & General is strong in this regard.
The downside to Legal & General is that life insurance is a difficult business to predict. It involves writing policies today without knowing whether or not they will be profitable in the future.
Rising interest rates, however, go some way towards offsetting this risk. Higher interest rates allow the company to earn a stronger return on the premiums it takes in.
I doubt that the Legal & General share price is going to feature in the FTSE 100 top performer list any time soon. But as a company that will distribute cash that I can reinvest elsewhere, I think it looks attractive.
Kraft Heinz
I’m also looking at Kraft Heinz (NYSE:KHC). The stock has a dividend yield of just over 4%, which isn’t as attractive as Legal & General, but I think that it looks attractive at the moment.
The stock is one of Warren Buffett’s largest holdings in the Berkshire Hathaway portfolio. I think that it would make a great addition to mine in September.
I see Kraft Heinz as a steady business. Demand for its products might fluctuate a little bit, but I think it is likely to remain reasonably consistent over time.
At first sight, Kraft Heinz looks unremarkable. Revenues have been mostly steady and the dividend hasn’t increased since 2018.
Importantly, though, the company’s debt has reduced considerably over this time. Total debt is now under $21bn, down from around $31bn.
The biggest risk to this business, in my view, is inflation. Passing the increased costs of labour, commodities, and transport through to consumers is going to be difficult.
Recently, though, management has been increasing investment in the company’s brands. In my view, this gives Kraft Heinz the best chance of increasing prices without losing customers.
This marks a significant change of approach to the previous focus on short-term margins. And I think that this is the right approach for Kraft Heinz going forward, which makes me confident buying the stock today.