If you've ever wondered why Wall Street and investors closely monitor Warren Buffett's every move, it's because his track record speaks for itself.
In 56 years as CEO of conglomerate Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%), Buffett has overseen the creation of $600 billion in shareholder value and delivered an average annual return for investors of 20%. In aggregate, this works out to roughly a 3,300,000% return since the beginning of 1965.
There are a lot of reasons for Buffett's long-term success. For starters, he tends to stick with cyclical companies, which benefit from disproportionately long periods of economic expansion. The Oracle of Omaha and his investing team also allow their investment theses to play out over long periods. But perhaps the single most important factor in Berkshire Hathaway's long-term success is Buffett's focus on dividend stocks.
Although Berkshire Hathaway doesn't pay dividends to its shareholders, it is expected to collect more than $5 billion in dividend income over the next year. Since companies that pay a recurring dividend are often profitable and time-tested, they're exactly what Buffett and his team are looking for in a long-term investment.
In fact, Buffett's patience has paid off big time with a trio of well-known, dividend-paying companies. Each of the following stocks has been held by Berkshire Hathaway for at least two decades, and the annual dividend yield from each company, based on Berkshire's cost basis, ranges from a low (yes, a low!) of 20% to a high of 52%.
American Express: 20% yield on cost
Berkshire Hathaway's investment portfolio currently holds nearly four dozen securities. Among them is credit services company American Express (AXP -0.48%), which is the third-longest tenured holding in Buffett's portfolio. With an average cost basis of $8.49 per share and an annual dividend payout of $1.72, AmEx is delivering a yield on cost of 20% to the Oracle of Omaha.
Financial stocks are unquestionably Buffett's favorite place to invest -- and with good reason. Even though recessions are an inevitable part of the economic cycle, downturns in the U.S. and global economy typically last for a few months to a couple of quarters. Comparatively, periods of economic expansion are almost always measured in years. American Express, which benefits from merchant fees and lending, is an ideal example of a company that outperforms when the U.S. and global economy are firing on all cylinders.
American Express' success is also a reflection of its ability to court affluent clientele. Well-to-do people are less likely to change their spending habits or become delinquent on their credit lines when minor economic contractions rear their heads. This sets up AmEx to bounce back from downturns faster than most lenders.
With American Express more than doubling its quarterly payout over the past nine years, it's all but assured that Buffett won't be selling Berkshire Hathaway's foundational stake in the company.
Moody's: 25% yield on cost
Have I mentioned that Warren Buffett really likes financial stocks? Credit ratings agency Moody's (MCO -1.42%) has been a continuous holding in Berkshire's portfolio since it was spun off from Dun & Bradstreet in 2000. Taking into account Berkshire's $10.05 per share cost basis for Moody's, as well as its $2.48 base annual payout, Buffett and his team are sitting back and collecting a 25% annual yield, relative to cost.
Although Moody's has a number of operating segments, two are leading the way. First, the company's credit ratings division has been, and should remain, busy. Historically low borrowing rates have encouraged businesses to issue debt in order to fund innovation, acquisitions, hiring, or in some instances share buybacks. Even if interest rates do begin to tick higher in late 2022 or early 2023, as insinuated by Fed commentary, demand for bond ratings should continue to be above historic norms.
The other segment really driving home growth for Moody's is analytics. Extraordinary volatility in the markets since the beginning of 2020, coupled with an ever-changing regulatory landscape in the U.S. and China, represent just some of the opportunities provided by Moody's analytics tools to help businesses maintain compliance and assess economic and credit risks. Analytics is a segment with sustainable double-digit sales growth potential.
With Moody's quarterly payout growing more than 500% in 11 years, Buffett has absolutely no reason to sell.
Coca-Cola: 52% yield on cost
But the most lucrative income opportunity, based solely on annual yield relative to cost, is beverage giant Coca-Cola (KO 0.88%). Coke is Berkshire Hathaway's longest-held stock (purchased in 1988), and comes with a cost basis of about $3.25 a share. Factoring in Coca-Cola's base annual payout of $1.68 equates to a yield on cost of 52%. Or, put another way, Coca-Cola doubles Buffett's initial $1.3 billion investment every two years solely from its dividend.
Coca-Cola is a dominant company in every sense of the word. Its products can be purchased in all but two countries worldwide (North Korea and Cuba), and it has over 20 brands generating at least $1 billion in annual sales. What's more, Coca-Cola holds 20% of cold beverage market share in developed markets, as well as 10% of cold beverage share in emerging markets. This means the company generates highly predictable cash flow in developed markets, while leaning on emerging markets for higher organic growth potential.
Coca-Cola's success is also a function of its on-point marketing campaign. Coke is one of the most recognized brands in the world, and has been reliant on everything from point-of-sale advertising to social media campaigns with well-known ambassadors to transcend generational gaps and reach consumers.
As a virtually recession-resistant company, Coke will undoubtedly remain a core holding for Berkshire Hathaway.