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 (KO 1.63%) 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.
Moody's: 25% annual yield, relative to initial cost basis
Another stellar dividend stock for the Oracle of Omaha, and perhaps one his greatest investments of all-time, is credit ratings agency Moody's (MCO 2.30%). Berkshire Hathaway has owned shares of Moody's since its spinoff from Dun & Bradstreet in 2000. With an initial cost basis of $10.05 and an annual base payout of $2.48, Moody's is yielding Buffett and his team about 25% a year!
At the moment, things couldn't be going better for Moody's. Historically low lending rates are encouraging businesses to issue debt at a rapid clip, which has kept Moody's credit ratings operations busy. Even with an expected slowdown in debt issuance in 2021, the segment should still generate sales and profits above historic norms.
Meanwhile, stock market volatility has played a role in bolstering the company's analytics segment. Businesses have come to rely on Moody's to help mitigate both domestic and international risks, with banks leaning on Moody's to stay in compliance with ever-changing liquidity rules and regulations.
Similar to Coca-Cola, we're not talking about a business whose growth is going to blow Wall Street out of the water. But with its fingers in so many aspects of the financial services industry, it's in really good shape to benefit no matter what happens to the U.S. economy in the short term.
American Express: 20% annual yield, relative to initial cost basis
Buffett is also making bank from financial services company American Express (AXP -0.49%), which has been a continuous holding in Berkshire's portfolio since 1993. Bought with a cost basis of $8.49, but paying out $1.72 annually, AmEx is on track to provide a 20% annual yield to the Oracle of Omaha's company in 2021.
The beauty of American Express' operating model is that it's a numbers game long-term investors are almost assured of winning. This is to say that AmEx, like other payment processors and lenders, feels the pain when recessions strike, but basks in higher levels of spending during periods of economic expansion. The thing is, recessions are often measured in months, while economic expansions last for years, or perhaps even longer than a decade.
American Express also has a knack for attracting affluent clientele. Wealthier cardholders are less likely to change their spending habits during minor economic disruptions, making it more likely that AmEx gets paid. These affluent clients, and the fees they pay, play a big role in pumping up the company's profits.
As with Coca-Cola, Buffett has zero incentive to ever part ways with his AmEx stock.