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Go Long on Income Inequality

Income inequality is one of the most highly discussed topics in the global economic forum today. In the years since the 2008-2009 financial crisis and Great Recession, the global economy has steadily recovered, but the vast majority of the global population has missed out on this recovery. Oxfam has reported that the wealthiest 62 people in the world now have as much wealth as the bottom 3.5 billion.

The issue of income inequality is now getting a lot of attention in the financial media. For investors, there is a key takeaway: owning appreciating assets that generate income is a great way to obtain wealth over time. Many of the world’s richest people did just that to generate their wealth. Others started their own business, but again, investors can profit right alongside them.

Please note, we at Dividend.com do not condone income inequality. This article merely serves to inform our readers how businesses react to such an environment.

Here are several stocks that investors can buy that are at the center of the income inequality issue.

The Rich Get Richer

The Oxfam report gets its data from the Forbes list of annual billionaires. This year, the Forbes list has many familiar names among the top 10. For example, the wealthiest person in the world according to Forbes is Bill Gates, founder of Microsoft (MSFT ). He has a net worth of more than $79 billion.

Microsoft is an excellent holding for creating wealth through dividends. The stock yields 2.7%, which is an attractive yield above the 2% average yield of the S&P 500. Furthermore, Microsoft is a high dividend growth stock. In the past five years, the company raised its dividend by 17% compounded annually. It has achieved this because of its prodigious free cash flow. In fiscal 2015, Microsoft generated $23 billion in free cash flow. Its dividend cost the company $9.8 billion in that time, which results in a modest 42% free cash flow payout ratio.

Microsoft is one of only three U.S.-based companies that hold a ‘AAA’ credit rating from Standard & Poor’s. Further, it has $99 billion in cash and short-term investments on its balance sheet, with just $27 billion in long-term debt. As a result, the company should have no trouble raising its dividend in the future.

Legendary investor Warren Buffett is also on the list, taking the No. 3 spot. Buffett is chairman of Berkshire Hathaway (BRK.B). While Berkshire itself doesn’t pay a dividend, many of Buffett’s biggest investments do. For example, Berkshire is the biggest shareholder of global beverage giant Coca-Cola (KO ), holding 400 million shares. That means it earns $528 million in annual dividends from this one investment. Coca-Cola stock pays a 3.1% dividend.

Berkshire is also the biggest shareholder of IBM (IBM ) stock. It owns slightly more than 81 million shares. That investment alone generates approximately $421 million in annual dividends based on IBM’s current $5.20 per share annualized dividend. IBM stock yields 4.24%, which is more than double the average yield of the S&P 500.

IBM stock has not performed well lately as its revenue and earnings growth continue to decline. The strengthening U.S. dollar is an added headwind suppressing IBM’s growth during its strategic turnaround. Revenue declined 9% last quarter. This prolonged revenue decline caused IBM stock to decline again in 2015. The stock is now down 20% in the past one year. But despite the company’s challenges, it still generates a great deal of cash flow ($13.1 billion of free cash flow in 2015, up $700 million from the previous year). This is where dividend payments come from, which is why IBM remains an attractive dividend stock.

Next on the list are several members of the Walton family. In fact, the No. 8, 9, 11, and 12 spots on the Forbes list are Waltons, descendants of the founder of Wal-Mart Stores (WMT ). Wal-Mart built itself up over time to become the biggest retailer in the world. The stock has not done well lately, but it continues to pay a rewarding 3% dividend. Wal-Mart has raised its dividend for 42 years in a row, making it a member of the Dividend Aristocrats list.

The Bottom Line

Income inequality is a major economic issue facing the entire world. As wealth becomes more concentrated than ever before, investors can see where the wealth is concentrated and act accordingly. As the rich get richer, the companies generating the most wealth for their founders and CEOs are frequently those that generate wealth for their investors as well.

Dividends are one of the best ways for investors to build wealth over time. Microsoft, Coca-Cola, IBM, and Wal-Mart Stores have created billions in wealth for their investors and founders. These stocks can be the cornerstone of a dividend-focused portfolio.