Meet the Stocks That Double Warren Buffett’s Initial Investment Just From Dividend Income Every 21 Months

Few investors get the attention of Wall Street’s aptly named “Oracle of Omaha,” Warren Buffett. Since he took over the position of CEO of Berkshire Hathaway (BRK.A 0.51%) (BRK.B 0.40%) in the mid-1960s, it practically doubled the benchmark’s annual total return S&P 500and generated an aggregate return of over 5,500,000% on his company’s Class A shares (BRK.A). Returns of this magnitude will create quite a stir on Wall Street.

For decades, Buffett has been, with few exceptions, an open book. At Berkshire Hathaway’s annual shareholder meetings, he willingly shares his views and wisdom on the US economy, the stock market, and occasionally some of Berkshire Hathaway’s individual holdings. Mirroring what the Oracle of Omaha does commercially has been a profitable investment strategy for decades.

But among the multitude of factors that have made Warren Buffett such a successful investor, the one that consistently doesn’t get enough credit is his love of dividend stocks. Adding income stocks to Berkshire’s roughly 43-stock, $316 billion investment portfolio has been vital to the company’s success.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Dividend stocks have a rich history of outperformance

On the surface, it’s easy to see why dividend stocks have collectively been unstoppable over the long term. Companies that willingly share a percentage of their earnings with investors on a regular basis tend to be repeatedly profitable, time-tested, and can almost always offer transparent long-term growth prospects. In other words, these are the types of businesses that we would expect to grow in value over time and rarely cost investors a night’s sleep.

But in addition to being predictable, dividend stocks have by a lot has overtaken long-term defaulters.

In The Power of Dividends: Past, Present and Futureinvestment advisors at Hartford Funds, in collaboration with Ned Davis Research, examined the many ways income stocks have outperformed non-paying public companies over the long term. In particular, the researchers found that dividend payers had an average annual return of 9.17% over 50 years, which was more than double the average annual return of 4.27% for non-payers since 1973 until 2023.

Additionally, the researchers showed that dividend stocks crushed defaulters while being considerably less volatile. While income stocks have been 6% less volatile than the benchmark S&P 500 over the past half-century, defaults have been 18% More volatile.

Perhaps it’s no surprise that most of Berkshire Hathaway’s holdings pay a dividend. Even after Buffett sold a significant percentage of Berkshire’s stake Apple and Bank of America in 2024, his company is on track to collect nearly $5 billion in dividends over the next 12 months.

Although the energy stock Occidental Petroleum topped Berkshire Hathaway’s annual revenue generator, it’s far from Buffett’s highest-yielding company on a cost basis.

Image source: Coca-Cola.

Warren Buffett doubles his money on this stock from dividend income alone every seven quarters

Thanks to the long-term ethos instilled by the late Charlie Munger, Berkshire’s portfolio is home to a number of stocks that have been held for 10 years or more. However, no company has been a fixture in Warren Buffett’s portfolio quite like the “forever” holding company. Coca cola (K.O -0.07%).

Coca-Cola has been a continuous Berkshire holding since 1988, with Buffett’s company enjoying an enviable cost basis of about $3.2475 per share.

What’s noteworthy about Coca-Cola is that it has increased its annual base pay for 62 consecutive years. Even though its current basic annual dividend of $1.94 per share equates to a 2.7% yield for buyers today, Buffett’s company is absolutely rolling in the dough thanks to its low cost base. The roughly 60% annual return that Berkshire Hathaway generates on its Coca-Cola stake relative to its cost base ensures that dividend income alone doubles Buffett’s initial investment in the beverage giant (about $1.3 billion dollars) every seven quarters (21 months). .

One of the reasons Coca-Cola has been able to deliver such consistent dividend growth for more than six decades is because it’s a consumer staples stock. Consumer staples such as food and beverages will be purchased regardless of how well or poorly the US or global economy performs. This results in predictable operating cash flow in any climate.

Another catalyst for sustained growth for Coca-Cola is its virtually unmatched geographic sales diversity. Apart from Cuba, North Korea and Russia — the latter linked to its invasion of Ukraine — Coca-Cola has operations in every other country. This means it can lean on higher-growth emerging markets to move its organic growth needle, and it also generates highly predictable cash flow from its core developed markets.

Branding is the other key piece to Coca-Cola’s continued success and solid dividend. Kantar’s annual Brand Footprint report finds that Coca-Cola has been the most purchased brand by consumers for an astounding 12 consecutive years.

The company’s branding is also supported by a stellar marketing team that relies on artificial intelligence (AI) and digital media to connect with younger consumers and draws on Coca-Cola’s rich history and on well-known brand ambassadors to engage with its more mature audience. .

With Warren Buffett overseeing the collection of $776 million in dividends each year from Berkshire’s stake in Coca-Cola, there is simply no reason for this supercharged yield position to ever be sold.