Since 1965, Berkshire Hathaway has averaged an annual return of 20% for its shareholders. This means investors have seen their shares double in value, on average, every 3.6 years since 1965. Between 1964 and 2020, Berkshire’s stock outperformed the benchmark S&P 500, including dividends, by an aggregate of nearly 2,800,000%.
Dividend stocks have played a major role in Buffett’s success
Buffett’s success has mostly been attributed to his identification of companies with sustainable competitive advantages, as well as his willingness to hold onto his investments for extended periods of time.
But what’s often overlooked in the Oracle of Omaha’s success story is the role dividend stocks have played. Businesses that pay a dividend have historically run circles around non-dividend-paying stocks over the long run. In addition, companies that pay a regular dividend are usually profitable and have time-tested operating models, which is precisely what Buffett looks for in a business. By holding successful dividend stocks over the long term, Buffett has been able to net an increasingly higher dividend yield relative to Berkshire Hathaway’s cost basis.
Taking into account Berkshire’s fourth-quarter 2020 investing activity, as well its preferred stock ownership in Occidental Petroleum, Buffett’s company is set to bring in more than $5 billion in dividend income in 2021. Based on an initial cost basis of $108.6 billion, this works to nearly a 5% yield on cost.
Buffett yields 20% or more annually from these long-tenured holdings
Yet, for some of Buffett’s tenured holdings, a 5% yield on cost would be peanuts. Buffett’s patience with the following three stocks has resulted in an annual yield of 20% to as much as 52%, based on Berkshire Hathaway’s initial cost basis.
Coca-Cola: 52% annual yield, relative to initial cost basis
Beverage giant Coca-Cola (NYSE:KO) is Buffett’s longest consecutive holding in Berkshire’s investment portfolio at 33 years. The 400 million shares Berkshire owns has a cost basis of $1.299 billion, which works out $3.2475 per share. With Coca-Cola raising its base annual dividend for the 59th consecutive year in February to $1.68, Buffett and his team will be collecting a 52% yield in 2021. Not too shabby for being patient and allowing your investment thesis to play out.
What makes Coca-Cola such a special stock to own is its combination of geographic reach and superior marketing. In terms of reach, Coke operates in every country worldwide, save for two — North Korea and Cuba. It holds 20% of the cold beverage market share in developed markets, has 10% of the cold beverage share in faster-growing emerging markets, and has at least 20 brands in its portfolio generating $1 billion or more in annual sales.
Coca-Cola has done a bang-up job with marketing, too. The company has close-knit tie-ins with the holidays, has been able to transcend generations with its willingness to advertise in print, television, and radio, as well as via social media, and has a number of well-recognized brand ambassadors.
Coca-Cola is never going to jaw-drop Wall Street with its growth rate. However, investors have come to count on predictable cash flow and mid-single-digit sales growth from the beverage giant. Suffice it to say, Coke is unlikely to be sold as long as Buffett is in charge of Berkshire Hathaway’s investment portfolio.
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