Whether you're a novice investor or have seen your fair share of stock market shakeouts, the past seven weeks have been a unique experience. The physical and financial toll created by the coronavirus disease 2019 (COVID-19) have pushed the stock market to its fastest bear market in history. It took a mere 17 trading sessions for all three major indexes to rack up losses of at least 20% from their recent closing highs.
In the process, many investors have seen a notable portion of their portfolio value "disappear." Of course, these paper losses likely pale in comparison to those of Warren Buffett. Through this past weekend, the Oracle of Omaha's portfolio at Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) had declined in value by close to $90 billion since the mid-February COVID-19 stock market crash began.
Buffett is netting a big-time bang for his buck with these stocks
However, these declines don't phase Buffett all too much. Having navigated through many bear markets, Buffett has traditionally used these times of immense fear to snatch up great businesses for a fair or discounted valuation. By holding these great businesses for very long periods of time, Buffett has been able to grow his wealth, and that of Berkshire's shareholders, many times over.
But the true testament of Buffett's buy-and-hold success can be seen when examining Berkshire Hathaway's yield on cost for some of the company's longest-tenured investments. "Yield on cost" simply refers to the dividend yield received based on the original cost basis of a position. For example, if your cost basis on a stock is $5, and it's now worth $30 per share with a $1 annual dividend, then your yield on cost is 20%, even though the current yield for new investors is a bit over 3%.
Given Buffett's affinity for profitable, time-tested businesses, I was able to find four core holdings that currently have a dividend yield on cost of at least 10%.
Coca-Cola: 50.5% dividend yield based on original cost basis
The cream of the crop in Buffett's portfolio just so happens to be his longest-tenured holding: beverage giant Coca-Cola (NYSE:KO). Based on Berkshire's cost basis, listed in the 2019 shareholder letter of around $3.25, and Coke's current dividend payout of $1.64 over a 12-month period, Buffett's yield on cost is over 50%! Put another way, Buffett is doubling his money on Coca-Cola, based on his initial cost basis, every two years solely because of Coke's dividend.
There's absolutely nothing to suggest that Coca-Cola's growth trajectory will slow. It has a relatively dominant 20% market share in developed market cold beverages, and has plenty of room for improvement with approximately 10% cold beverage market share in emerging markets. This combination of geographic reach, strong brand recognition, and effective marketing, is likely why Buffett will never part with his shares of Coca-Cola, which were first purchased in 1988.
Moody's: 22.3% yield on cost
Buffett has been a shareholder of Moody's (NYSE:MCO), a provider of credit ratings, analytics, and financial assessment services, since it was spun off from Dun & Bradstreet back in 2000. Over the past two decades, Moody's share price grew by more than 2,260%, through Dec, 31, 2019. Even though Moody's current annual payout of $2.24 per share is nothing to write home about (about a 1.1% yield), it works out to a considerably more impressive 22.3% yield based on the original cost basis of $10.05 in 2000.
For the past decade, Moody's has really benefited from increased global bond issuances. Considering just how anemic yields and interest rates are at the moment, it wouldn't be surprising if debt issuances surged in 2020 and 2021, providing Moody's with plenty to keep its credit rating operations busy.
Research analytics should also be a solid near-term driver, especially given the unprecedented volatility and market disruption we've witnessed of late.
American Express: 20.3% yield on cost
Another longtime holding for the Oracle of Omaha is credit-services provider American Express (NYSE:AXP). Having held a stake in AmEx since 1993, Berkshire Hathaway's cost basis comes out to about $8.49 per share. Considering that American Express is expected to hand back $1.72 per share this year in dividend payouts , Buffett and his team are walking away with a yield on cost of more than 20%!
One of the keys to AmEx's long-term success is the company's focus on more affluent clientele. Higher income-earners aren't as likely to be affected by minor economic fluctuations, meaning American Express doesn't have to worry as much about credit delinquencies and changing spending habits for its cardholders.
American Express is also a double-dipper in that it processes payments for merchants and acts as a lender. This means it can really pack on the profits during periods of economic expansion by collecting processing fees as well as interest and fees associated with its credit cards.
Wells Fargo: 10% yield on cost
Last, but not least, is money-center bank Wells Fargo (NYSE:WFC). A Berkshire holding for roughly the past 30 years, Wells Fargo has a cost basis of about $20.35 per share, but is expected to pay out $2.04, in total, over the next year. That's a yield on cost of 10%, which isn't too shabby for a big bank.
The longtime thesis for owning Wells Fargo is that it did a good job of attracting affluent clientele, and it produced superior return on assets relative to most big banks. However, that thesis has been challenged in recent years following the 2016 scandal that uncovered the creation of 3.5 million fake accounts in order to satisfy aggressive branch-based cross-selling goals. Now on its third CEO in about as many years, Wells Fargo is attempting to rebuild trust with consumers.
As for Buffett, he's been paring down his holdings in Wells Fargo, which once totaled more than 479 million shares and now totals about 323.2 million shares. Buffett is a big believer in a strong management team and a company's reputation. Wells Fargo appears to have failed on both accounts, and it remains to be seen how much of Berkshire's position the Oracle of Omaha will choose to keep, even with this impressive yield on cost.