Warren Buffett is arguably the greatest investment mind of our time. As CEO of conglomerate Berkshire Hathaway (BRK.A 1.69%) (BRK.B 1.64%), Buffett has seen his net worth skyrocket to $81 billion, as of this past Tuesday, March 3. He's also created more than $400 billion in market value for Berkshire Hathaway's shareholders over many decades.
What's so impressive about Buffett's investing strategy is that he's doing something any investor on the planet could do. Namely, he's taking the time to research sectors and industries he cares about, and buying into businesses with perceived competitive advantages. Most important to Buffett's investment formula, once he makes an investment, he holds for a very long period of time, thereby allowing a company's competitive advantages to shine.
Buffett's longest-held investment abounds with competitive advantages
While there are a number of stocks that Buffett has held for an extended period of time, perhaps no company embodies the buy-and-hold ethos that the Oracle of Omaha preaches more than beverage giant Coca-Cola (KO 2.34%).
Coca-Cola has been a core holding in Berkshire Hathaway's investment portfolio for roughly 31 years (and counting). One reason Buffett has been such a big fan of Coca-Cola is the company's business model is very easy to understand. Coca-Cola predominantly sells cold beverages around the world, making it pretty easy for investors to wrap their hands around the factors that might affect input costs and consumer demand. In other words, a company like Coca-Cola offers few surprises come earnings time.
In addition, surveys have shown that Coca-Cola is among the most recognized brands in the world. This shouldn't come as a surprise given that the company operates in every country around the globe, save for one (North Korea). In addition to using aesthetically pleasing and engaging packaging (a hallmark of Coca-Cola for decades), the company has also turned to point-of-sale advertising, digital marketing, and social media (via influencers) to further promote brand awareness.
Buffett also can't overlook just how dominant Coca-Cola has been for decades. Right now, it holds about 20% of cold beverage market share in developed markets, as well as 10% of cold beverage market share in developing and emerging markets. This demonstrates the consistency of cash flow today, as well as the long-run opportunity that still awaits Coca-Cola given that it holds only 10% cold beverage market share in countries where 80% of the world's population resides.
But what might be most impressive about Buffett's purchase of Coca-Cola is what compounding can do to an investment over time.
No joke: Buffett doubles his money on Coca-Cola every two years
According to Berkshire Hathaway's 2019 annual shareholder letter, the company's cost basis on Coca-Cola is only $1.299 billion. With the value of Berkshire's position in Coke now worth $23.3 billion, you could rightly say that Buffett has a winner on his hands.
But it's not Coca-Cola's share price appreciation that's so impressive. Rather, it's the company's dividend. In February, Coke increased its annual payout to $1.64 per share, marking the 58th consecutive year that it's raised its dividend. This places Coca-Cola among the elite of the S&P 500's Dividend Aristocrats.
With 400 million shares owned, Berkshire Hathaway will collect $656 million in dividend income over the next year. This represents a big chunk of the estimated $4.72 billion in dividend income Buffett should bring in from his entire portfolio over the next 12 months. Yet what's really astounding is that this $656 million in dividend income represents a yield of 50.5% relative to the company's cost basis on Coca-Cola of $1.299 billion. In other words, even though Coca-Cola is one of the least-volatile large-cap stocks, Buffett is doubling his money every two years solely from the dividends Berkshire Hathaway is receiving.
And Coca-Cola isn't alone, albeit it is the best example of what happens when investors allow great companies to grow over time. Payment processor and lender American Express (AXP 1.28%), which Buffett has held since 1993, has a cost basis of $1.287 billion, according to Berkshire's 2019 shareholder letter. Based on the 151,610,700 shares of American Express Buffett's company owns, this works out to almost $261 million in expected dividend income in 2020. That's a yield of 20.3%, relative to Berkshire's initial cost basis on American Express, which means Buffett can double-up on AmEx in less than five years.
Behold the power of dividends
If this exercise proves anything, it's just how powerful dividend income can be over time.
As one last note, I'd point to a report put out by J.P. Morgan Asset Management in 2013. In this report, analysts examined the performance of publicly traded companies that initiated a dividend and grew their payouts between 1972 and 2012. The report showed that dividend-paying stocks initiating and growing their payout appreciated in value by an average of 9.5% per year over this four-decade period. Comparatively, non-dividend-paying stocks slogged their way to an average annual gain of just 1.6% over this same time frame.
Dividend stocks are typically profitable, time-tested, and relatively transparent. That makes dividend stocks ideal for long-term investors. Buffett knows it, and you should, too.