When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. -- Warren Buffett, 1988 Berkshire Hathaway shareholder letter
The blue-chip-heavy Dow Jones Industrial Average recently tipped over into bear market territory, meaning the index has fallen at least 20% from its previous high.
No matter how many times you've seen the markets fall and then recover, it always feels unsettling to see your savings suddenly drop by 20%. There's always a sense that maybe your stocks won't come back, but that's where following the timeless investing advice of Warren Buffett can help stack the odds in your favor.
When it comes to managing Berkshire Hathaway's stock portfolio, Buffett usually invests in large, profitable companies, and he always buys them at sensible valuations. What follows are two top stocks from Berkshire's portfolio, both Dow Jones stocks, that investors can expect to deliver solid returns over the long term, while earning dividend income along the way.
Apple's installed base of devices continues to grow
Apple is increasingly looking like a "forever" investment for Buffett. He originally sank $36 billion in Apple (AAPL 0.32%) stock between 2016 and 2018, and it's still Berkshire's largest holding, worth a whopping $122 billion at the end of the second quarter.
Apple has a tremendous pull on the consumer. The iPhone consistently earns high customer satisfaction scores, and the large profit margin and free cash flow Apple generates every year allow for continuous improvements and investments in new products and services. Apple said it attracted a record number of switchers from other brands in the last quarter, which says a lot about its brand power.
While the latest reports suggest that initial sales of the iPhone 14 might be weaker than expected, that shouldn't scare you from buying the stock right now.
What's really building shareholder value at Apple is the growing installed base of devices. Apple reported a record high for its installed base last quarter, which has been a regular occurrence in recent years. This paves the way for further growth in sales of apps and subscriptions through the App Store, which generates a third of the company's gross profit.
Apple is also a major repurchaser of its shares, something Buffett likes to see when buying stocks. It has reduced its shares outstanding by 21% over the last five years. Share buybacks proportionally increase shareholders' percentage ownership of the entire company, which is like receiving an indirect dividend that keeps compounding in value along with the growth of the underlying business.
Apple also pays a growing stream of dividend payments to shareholders, with the current yield at 0.61%. Make no mistake, Apple is a top tech stock to buy and hold for the long term. It isn't a bargain, but a forward price-to-earnings (P/E) ratio of 24 is a fair valuation for one of the world's strongest brands.
Coca-Cola has the pricing power to counter high inflation
Buffett originally bought shares of Coca-Cola (KO 0.20%) after the 1987 market crash. Berkshire has been one of the company's largest shareholders ever since, currently holding 400 million shares, worth $25 billion at the end of the second quarter.
Coca-Cola has tremendous brand power, and it's a great stock to consider holding no matter what happens to the economy. Consider its recent performance in the second quarter. Adjusted revenue grew 16% year over year, with adjusted earnings up 4%. Coke's ability to raise prices on its products to stay ahead of inflation is a key reason the stock has outperformed the market year to date -- it's only down 5.3% at the time of writing.
Coke's products are affordable and can be purchased in large quantities with each visit to the grocery store. Because of these characteristics, small increases in unit selling prices don't impact sales volumes at all. This allows Coke to maintain a high profit margin to fund growing dividend payments and share repurchases.
Coca-Cola has repurchased roughly a third of its stock over the last 30 years. It also distributes about three-quarters of its annual earnings per share in dividends every year. The current yield is 3.11%, nearly double the S&P 500's average yield of 1.70%. In other words, investors can earn about $150 a year in income off a $5,000 investment.
Strong brands, pricing power, and cash returns to shareholders are three good reasons to buy the stock. While the stock trades at a forward P/E of 23, Coke's above-average dividend yield makes it a great stock to hold through retirement.