Few (if any) money managers command the attention of professional and everyday investors quite like the billionaire CEO of Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) Warren Buffett. The Oracle of Omaha's track record likely has something to do with that.
Since taking the reins of Berkshire in 1965, Buffett has overseen the creation of more than $620 billion in shareholder value, as well as delivered a greater than 3,600,000% aggregate return for his company's Class A shares (BRK.A). For context, this aggregate return is 120 times better than the benchmark S&P 500's total return, including dividends paid, over the same time frame (through Dec. 31, 2021).
In other words, when Warren Buffett and his investment team add to or reduce a position, investors pay close attention because riding the Oracle of Omaha's coattails has proved extremely profitable for decades.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
The Oracle of Omaha's love for dividend stocks has played a big role in his success
While there are a number of reasons that account for Berkshire Hathaway's success over more than a half-century, an oft-overlooked catalyst is Warren Buffett's affinity for dividend stocks. Buying income stocks holds a number of advantages.
To begin with, the vast majority of companies that pay a regular dividend are profitable on a recurring basis and have almost always navigated their way through at least one major economic downturn. In short, they're time-tested businesses that investors have come to trust over many years or decades.
Dividend stocks are also long-term outperformers. Nine years ago, J.P. Morgan Asset Management released a report that compared the performance of companies that initiated and grew their payouts over a 40-year period (1972-2012) to stocks that didn't offer a dividend. The end result was, as you might have imagined, a runaway victory for the income stocks.
The companies that continued to grow their dividends averaged a 9.5% annual return over four decades. Comparatively, the non-dividend stocks crawled to a meager 1.6% annualized gain.
But there's another big-time advantage to dividend stocks that I've not yet mentioned: Time.
Buying and holding dividend stocks that grow their payouts over extended lengths of time can lead to increasingly higher yields, relative to your cost basis. It's a "secret" Warren Buffett knows all too well. Buying and holding the following three time-tested stocks has resulted in annual yields (relative to cost) of between 24.5% and 54.2%!
Coca-Cola: 54.2% yield, relative to Berkshire Hathaway's cost basis
The real jaw-dropper in Warren Buffett's portfolio from a yield perspective is Coca-Cola (KO 0.15%). Berkshire Hathaway has been holding shares of the beverage giant since 1988 at a cost basis of $3.2475 per share. With Coca-Cola riding a 60-year (and counting) streak of increasing its base annual payout, the company's current annual dividend of $1.76/share works out to a (drum roll) 54.2% yield!
Time is a considerable ally when investing in consumer staples stocks. No matter how poorly the U.S. or global economy perform, consumers usually don't change their food-and-beverage consumption habits. This leads to highly predictable revenue and operating cash flow from one year to the next for Coke.
Something else that's made Coca-Cola's dividend payment so rock solid is the company's geographic diversity. Excluding North Korea, Cuba, and Russia (the latter being due to its invasion of Ukraine), Coke has operations in every other country worldwide. This means it can generate predictable operating cash flow from developed countries, where it currently holds a 20% share of the cold beverage market, while leaning on emerging markets to boost its organic growth rate.
Image source: Getty Images.
Moody's: 27.9% yield, relative to Berkshire Hathaway's cost basis
Patience has also helped Warren Buffett's company net a juicy dividend yield from credit-rating agency Moody's (MCO 0.77%). Moody's has been a continuous holding for Berkshire Hathaway since 2001, with a cost basis of just $10.05/share. Moody's $2.80 annual payout means Buffett and his team are licking their chops while collecting a 27.9% annual yield.
Even though Moody's doesn't offer the same level of safety and cash flow predictability that Coca-Cola brings to the table, certain factors have worked in the company's favor for a long time. For instance, since lending rates remained at historic lows for much of the past decade, Moody's credit-rating segment has been kept busy. Of course, it wouldn't be a surprise to see new bond issuances decline in the coming quarters as interest rates climb.
Thankfully, Moody's has another operating segment that can fill the void. Moody's Analytics provides a variety of risk-management tools used by businesses and individuals worldwide.
It's not uncommon for this segment to perform well during periods of turbulence for the stock market and/or global economy. In terms of long-term growth potential, Analytics should be Moody's needle mover.
American Express: 24.5% yield, relative to Berkshire Hathaway's cost basis
Warren Buffett has also used time to his advantage with payment-processor American Express (AXP 2.56%). Berkshire Hathaway has been holding shares of AmEx since 1993 at a cost basis of about $8.49. With American Express paying $2.08/share annually in dividends, this works out to a hearty 24.5% annual yield.
Though this might sound counterintuitive, being cyclical is actually a big reason why this company is so successful. On one hand, recessions are an inevitable part of the economic cycle. On the other hand, economic expansions typically last substantially longer than recessions. Buying and holding financial stocks like AmEx has allowed Warren Buffett to take advantage of the global economy (and spending) expanding over long periods.
To build on this point, American Express really enjoys periods of expansion, considering that it gets to "double dip." As I recently pointed out, AmEx collects fees from merchants for processing transactions and also acts as a lender. During long-winded expansions, it's able to collect interest income and fees from its cardholders.
As one final note, American Express has done an excellent job of signing up affluent customers. High earners are less likely to change their spending habits or miss their payments during minor economic downturns.
