Bill Gates is currently the richest person in the world. He has amassed a $79 billion fortune. There are 2 other people in the $70 billion+ club; Warren Buffett and Carlos ‘Slim’ Helu.

Bill Gates made his fortune by founding Microsoft. Since retiring, he has divested himself of Microsoft and now owns a concentrated portfolio.

A full 57% of Bill Gates’ portfolio is invested in just one stock, Berkshire Hathaway Inc.(NYSE:BRK.B). Bill Gates clearly has much respect for the investing skills of Warren Buffett.

The next 4 largest holdings in Bill Gates’ portfolio all pay dividends. Together, these 4 holdings account for over 21% of his portfolio. These 4 stocks are all lower-risk ‘blue chip’ stocks with strong competitive advantages.

This article takes a deeper look at Bill Gates’ 4 largest dividend holdings.

Caterpillar Inc.

Caterpillar Inc. (NYSE:CAT) currently makes up 4.8% of Bill Gates’ portfolio. Caterpillar is the industry leader in construction equipment manufacturing.

The company has a long history of rewarding shareholders with rising dividends. The company has not reduced its dividend payments since 1982.

Caterpillar is a member of the Dividend Achievers index, which includes only stock with 10+ years of consecutive dividend increases. Click this link to see download a list of all 238 Dividend Achievers.

Caterpillar has grown its dividend payments at 12.2% a year over the last decade. The company is highly cyclical, however. Right now, Caterpillar is in a ‘down’ phase. When commodity prices fall, Caterpillar sees its earnings decline. The company generates a sizeable portion of its revenue from energy and mining equipment sales. Declines in construction also hurt Caterpillar stock.

With the recent declines in energy and mineral prices, Caterpillar’s earnings have temporarily fallen. The company’s expected earnings-per-share in 2015 are forecasted to be down 46% versus all time earnings-per-share highs set in 2012. This makes now a good time to buy Caterpillar stock at a discount.

Caterpillar is currently trading for its highest dividend yield since the Great Recession of 2007 to 2009. Now is the best time in the last 6 years to buy Caterpillar stock based on its dividend yield. Caterpillar currently has a 4% dividend yield.

Wal-Mart Stores, Inc.

Caterpillar is an industry leader. So is Bill Gate’s 3rd largest blue chip dividend holding, Wal-Mart Stores, Inc. (NYSE:WMT). Wal-Mart makes up 5.1% of Bill Gate’s portfolio. The company is the global leader in discount retail. Wal-Mart’s scale is impressive: the company generated over $485 billion in sales in the last 12 months.

Wal-Mart is a Dividend Aristocrat thanks to its 42 consecutive years of dividend increases. Wal-Mart’s long streak of rising dividends is evidence of its strong competitive advantage.

Wal-Mart’s price-based competitive advantage comes from its massive scale and efficient supply chain. The company buys in large quantities and demands discounts from its suppliers – Wal-Mart then passes these savings on to its customers.

Now is an excellent time to buy into Wal-Mart stock. The company is currently trading for a price-to-earnings ratio of just 14.8. The price-to-earnings ratios of several of Wal-Mart’s competitors are shown below for comparison:

  • Target has a price-to-earnings ratio of 20.8
  • Costco has a price-to-earnings ratio of 28.0
  • Dollar General has a price-to-earnings ratio of 22.1
  • Big Lots has a price-to-earnings ratio of 16.6

Wal-Mart has the lowest price-to-earnings ratio in the discount retail industrydespite being the industry leader. In addition to its low valuation, Wal-Mart also has a solid 2.7% dividend yield.

Wal-Mart performed exceptionally well through the Great Recession of 2007 to 2009. The company managed to increase its earnings-per-share each year through the Great Recession.

Wal-Mart grew its earnings-per-share at 6.2% a year over the last decade. The company currently has an above-average dividend yield, and scores high marks for safety and stability. In addition, the company appears undervalued at this time. Because of these factors, Wal-Mart is a favorite of The 8 Rules of Dividend Investing.

Waste Management, Inc.

Waste Management, Inc. (NYSE:WM) is the United States leader in waste management services. The company has a market cap of $22.5 billion and was founded in 1968.

This is the 3rd company in Bill Gates’ portfolio that is an industry leader, joining Caterpillar and Wal-Mart. Bill Gates has 5.4% of his portfolio invested in Waste Management.

Like Caterpillar & Wal-Mart, Waste Management also has a long dividend history. The company has increased its dividend payments each year since 2003.

Waste Management has a strong competitive advantage in the waste management services industry. The company’s unique competitive advantage comes from its established network of over 310 transfer stations, 260+landfills, and transportation fleet. It would cost potential competitors a huge up front amount to be able to match Waste Management’s extensive network.

Waste Management has grown its earnings-per-share at around 5% a year over the last decade. The company should grow at least this fast over the next several years. Waste Management has opportunities to grow through bolt-on acquisitions of smaller local/regional collection services. As the company continues to grow, it should realize efficiency gains as well.

Waste Management currently has a dividend yield of 3.1%. The company’s 3%+ yield combined with expected earnings-per-share growth gives investors like Bill Gates expected returns of over 8% a year.

Waste Management’s forward price-to-earnings ratio is 18.3. The company is trading at about the same forward price-to-earnings ratio as the S&P 500. Given the company’s solid total return potential and relative safety, Waste Management appears fairly valued at this time.

Canadian National Railway (USA)

Canadian National Railway (USA) (NYSE:CNI) is Bill Gates’ largest holding behind Berkshire Hathaway. Canadian National Railway currently makes up 6.1% of Gates’ portfolio.

Canadian National Railway was founded in 1918. Like every other large holding in Bill Gate’s dividend portfolio, Canadian National Railway is a market leader. The company is the largest railroad business in Canada.

The railroad industry is notoriously slow changing. The industry has changed little in the last 100 years. As a result, Canadian National Railway has little risk of business obsolescence. The company also performed well during the Great Recession of 2007 to 2009. Earnings-per-share fell from a high of $1.70 to a low of $1.52 during the Great Recession, which is mild compared to the losses that occurred in other industries (like automobiles, and finance).

When one thinks of a fast-growing businesses, railroad companies are not the first thing that springs to mind. However, Canadian National Railway has compounded earnings-per-share at 11.8% a year over the last decade.

The company’s earnings-per-share are expected to continue growing at around 11.5% a year for the next several years. As Canada’s largest rail company, Canadian National Railway is able to realize high margins. The company’s operating margin is around 48% a year… Significantly higher than either the operating margins of either Apple (33%) or Google (31%). Who knew that railroads were more profitable than tech companies?

Canadian National Railways 11.5% expected earnings-per-share growth combined with the company’s current 1.7% dividend yield gives investors expected total returns of over 13% a year.

Canadian National Railway appears to be fairly valued at this time. The company is trading for a price-to-earnings ratio of 19.7. This is reasonable for an industry leading business with excellent total return prospects over the next several years.

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