Some of the best income stocks on the market can be found on the very small and exclusive list of Dividend Kings. These are the S&P 500 index companies that have raised their stockholder payouts at least once annually for a minimum of 50 years running.
The best attracts the best. Case in point: Warren Buffett and his investment vehicle Berkshire Hathaway (BRK.A -0.56%) (BRK.B 0.07%). Buffett is well acquainted with two giant crown-wearers, Coca-Cola (KO 0.29%) and Procter & Gamble (PG 0.38%). The pair have been in Berkshire's equity portfolio for years. Let's take a brief look at the two, and see whether they can be productive buys for the rest of us too.
1. Coca-Cola
Buffett is probably the world's ultimate Coca-Cola bull, as Berkshire bought into the beverage giant in 1988.
Buffett has never relinquished his holding in the company; to this day it's one of Berkshire's anchor positions. It accounts for almost 8% of the equity portfolio, and on that basis it's the company's fourth biggest position (it's also No. 4 in terms of total value, which is just under $25 billion).
It's easy to understand why. Buffett has always loved highly and consistently profitable businesses that throw off cash, and Coca-Cola is a featured artist in this gallery. With a foundational product that consists almost entirely of sugar and water, the company's operating expenses are low and its sales high -- think of it, have you ever been to a place anywhere in the world where Coke isn't available?
Of course, the company isn't entirely about one product. In fact, it has over 200 brands. In tune with the more health-conscious times we live in, these include beverages such as Minute Maid orange juice and the "semi-sweet" offerings of the Honest beverage line.
Although Coca-Cola is a mature company, it's constantly looking for that next blockbuster product or idea. In February, for example, it launched Coca-Cola Creations, basically a public laboratory for limited-edition variations of the company's tried-and-true cola product. It might not land on the next great soft drink idea during its lifetime, but it's admirable that the company's trying to push out its boundaries a little.
Meanwhile, management knows how to put some fizzy growth into the fundamentals. Full-year 2021 revenue zoomed 17% higher to $38.7 billion, a tally that was ahead of the pre-pandemic 2019. Non-GAAP (adjusted) per-share earnings also took off, rising 19% year over year to $2.32.
These numbers auger very well for continued dividend raises. We can also count on improving fundamentals, as the company has a long-standing habit of delivering them. Long live Coke!
Image source: The Motley Fool.
2. Procter & Gamble
Consumer goods mainstay Procter & Gamble doesn't have the pride of place Coca-Cola enjoys in the Berkshire pantheon. That's because it's essentially a legacy position, deriving from Berkshire's stake in the once independent Gillette (bought by Procter & Gamble in 2005).
While it may be one of the smaller holdings, Buffett's stake in Procter & Gamble is considerable by ordinary investor standards -- all told, Berkshire has 315,400 shares in the company, a position worth more than $48 million at the current stock price.
As a company that sells a raft of familiar medicine-cabinet, laundry-room, and broom-closet staples (Gillette razors and accessories, Tide detergent, Swiffer cleaning devices, etc.), it's hardly a high-growth story. Outside the occasional pandemic, it's highly doubtful there's ever going to be a sudden and surprising run on, say, Bounty paper towels.
So when Procter & Gamble grows, it tends to grow slowly. Its 2022 second fiscal quarter ended Dec. 31. was entirely in character -- net sales rose at a not-all-that spectacular 6% year over year (to $21 billion), while "core" (non-GAAP, or adjusted) net income per share inched up by 1%.
A more revealing line item is what the company terms "free cash flow productivity" -- free cash flow (FCF) as a percentage of net income. Adjusted FCF productivity for the second quarter was a whopping 106%, meaning it came in above net income. That's some admirable financial discipline there. And since adjusted FCF totaled nearly $4.5 billion, you can bet that there was plenty of money on hand, as ever, to keep funding the dividend.
Procter & Gamble has been renowned for decades as a dividend stock, so the company makes sure to add enough to the distribution every year to keep investors happy. For instance, from calendar 2017 to 2021, the total annual dividend payout per share increased by 24%.
These days Procter & Gamble's dividend yield is 2.3%, rather respectable considering the company's rock-solid reliability and the strength of its brands. I'd say it's almost a no-brainer buy for those who favor and appreciate dividend stocks.
