Few investors have a knack for making money quite like Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett. Since becoming CEO in 1965, the Oracle of Omaha has created more than $710 billion in shareholder value and led the company's Class A shares (BRK.A) to a gain of more than 3,900,000%.
One of the many reasons Buffett is so successful is his willingness to let his investment theses play out over long periods of time. Being patient has allowed Buffett's holdings to appreciate in value along with the U.S. and global economy over many decades.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Additionally, this patience has allowed the dividend stocks in which Berkshire Hathaway holds stakes to increase their payouts significantly. When income stocks are held for decades, their yields, relative to cost basis, can skyrocket. That's exactly what's happened to three of Warren Buffett's stocks.
Thanks to the Oracle of Omaha's long-term mindset, the following stocks are now yielding between 20% and 54% annually for Berkshire Hathaway.
American Express: 20.3% annual yield, relative to cost basis
Credit-services company American Express (AXP -0.62%) is one of Berkshire Hathaway's longest continuous holdings. It's been a fixture in Buffett's portfolio since 1993, with a cost basis of $8.49 per share.
However, AmEx has substantially grown its quarterly payout over the past three decades. Even though its current yield is slightly below 1%, the company's $1.72 base annual payout works out to a 20.3% annual yield on cost for Berkshire Hathaway.
There are two reasons American Express has been such a successful long-term holding for Buffett. First of all, it's a cyclical company that benefits immensely when the U.S. and global economy are firing on all cylinders.
Even though Buffett is well aware that recessions are inevitable, he also understands that periods of economic expansion last considerably longer than contractions. This allows AmEx to benefit from an increase in consumer and business spending over long periods of time.
To build on this point, AmEx acts as both a payment processor and lender. By lending, the company is able to generate fee and interest-based revenue during these long-winded periods of economic expansion. Essentially, the company can double-dip when the U.S. and global economy are growing.
The second factor working in American Express' favor is its ability to court affluent cardholders. Well-to-do people are less inclined to alter their spending habits when economic contractions or recessions arise. This makes it less likely that AmEx will deal with a surge in loan or credit delinquencies.
Image source: Getty Images.
Moody's: 27.9% annual yield, relative to cost basis
Interestingly, AmEx isn't the highest-yielding financial stock in Warren Buffett's portfolio. That honor belongs to credit-ratings agency Moody's (MCO 0.25%), which has been a continuous holding since being spun off from Dun & Bradstreet in 2000.
According to Berkshire Hathaway's recently filed annual shareholder letter, Buffett's cost basis on Moody's is about $10.05 per share. Despite Moody's current yield totaling a meager 0.86%, the company's base annual payout of $2.80 works out to a nearly 28% yield, relative to Buffett's cost basis.
There are two catalysts that really make Moody's tick. To begin with, the company's debt-rating division has benefited from historically low lending rates over the past decade. With lending rates pushing lower, Moody's was tasked with reviewing and rating an increasing number of corporate-bond offerings. Even now, with the Federal Reserve set to begin raising rates next week, rates remain low enough that Moody's ratings division should remain busy.
But perhaps the bigger growth opportunity moving forward stems from Moody's analytics segment. This is a division that helps businesses maintain regulatory compliance, as well as assess a variety of economic and credit risks.
Over just the past couple of years, we've witnessed a trade war between the U.S. and China, a global pandemic unlike anything we've seen over the past century, and now, a conflict between Russia and Ukraine. These represent some of the many examples where Moody's Analytics segment will be relied on to help businesses navigate uncertain economic situations.
Considering that Moody's has increased its quarterly payout by 600% since 2010, there's a good chance Buffett's annual yield on cost of 28% will head substantially higher in the years to come.
Image source: Coca-Cola.
Coca-Cola: 54.2% annual yield, relative to cost basis
The highest-yielding stock in Warren Buffett's portfolio, relative to cost basis, is beverage-giant Coca-Cola (KO). Coke also happens to be Berkshire Hathaway's longest-held stock, with a continuous position since 1988.
The latest Berkshire shareholder letter shows a cost basis of $1.299 billion on the company's 400,000,000 Coke shares. This works out to a cost basis of $3.2475 per share. With Coca-Cola recently increasing its base annual dividend for a 60th consecutive year, the $1.76 paid yearly equates to a whopping 54% yield on cost. Effectively, Buffett is more than doubling his money on Coke every two years from its dividend alone.
Among the nearly four dozen securities in Berkshire Hathaway's portfolio, Coca-Cola might generate the most predictable sales growth and cash flow. That's because the company has a presence in all but two countries worldwide (North Korea and Cuba). It also controls approximately 20% of the cold beverage market share in developed countries and 10% of the cold beverage share in emerging markets. This helps Coke bring in predictable cash flow from developed markets while benefiting from faster organic growth opportunities in emerging markets.
Coca-Cola's marketing is another reason the company has performed so well over the very long run. Coke is one of the most well-known brands in the world. The company utilizes everything from its holiday tie-ins and point-of-sale advertising to digital marketing campaigns with recognizable ambassadors to connect with consumers.
Taking into account the stability of Coca-Cola's operating model and the incredible yield Berkshire Hathaway is netting annually on its stake, it's unlikely Warren Buffett will ever part with this position, as long as he's in charge.
