One of the more notable investments in acclaimed investor Warren Buffett's career was Coca-Cola (KO +0.76%). Buffett is a longtime fan of its signature drink, a factor that likely helped inspire the 9% stake that his company, Berkshire Hathaway (BRK.A +1.28%) (BRK.B +1.32%), took in the beverage giant in 1988.
But despite the gains made over 35 years, the investment has arguably earned more attention for Buffett as a dividend stock. Investors should capitalize on that attention, as it offers a lesson about the benefits of dividend growth and shows how payouts play a potential role in driving a long-term investment strategy.
Berkshire's dividend income from Coca-Cola
Berkshire owns 400 million shares of Coca-Cola stock. Consequently, the $1.76 per share annual dividend earns new buyers a cash return of around 2.9%, well above the 1.7% return of the S&P 500.
But both are a pittance of Berkshire's yield in Coca-Cola. In 2022, Berkshire received $704 million in dividend income from Coca-Cola. On an original investment of $1.3 billion, that amounted to a yearly return of 54%!
That return is so high because Berkshire bought most of its Coca-Cola shares in 1988 and 1989, beginning the purchases soon after the 1987 stock market crash. Moreover, Coca-Cola has maintained a 60-year streak of payout hikes, making it a Dividend King. Hence, those 35 years of payouts have earned Berkshire nearly $10.2 billion in dividend income from this stock!
Putting the Coca-Cola investment into perspective
Although that sounds like an impressive return on a $1.3 billion investment, some factors may discount the significance and appeal of Coca-Cola's dividend. For one, Berkshire's stake in Coca-Cola is now worth just over $24 billion. That means that stock price growth drove the majority of Berkshire's total return in this stock, not dividends.
Investors should also remember that Coca-Cola stock is likely not a buy at this stage. An implicit confirmation of that feeling appears to come from Buffett himself, as Berkshire bought its last stake in the company in 1994. Even then, the dividend could be the only reason Buffett's team treated this stock as a hold rather than a sell.
That dividend may also face an uncertain future. Coca-Cola generated $7.3 billion in free cash flow in the first nine months of 2022. Dividends and payables cost the company about $5.8 billion, leaving little capital for share repurchases or investments in the company. That also makes future payout hikes more difficult without a meaningful improvement in free cash flow.
Where the opportunity may lie
For now, Coca-Cola can make you money in your sleep, but neither its yield nor Berkshire's investment in Coca-Cola are clear signs to buy the beverage stock.
Still, considering Berkshire's dividend gains, it can serve as a lesson to invest in dividend stocks like Buffett. While few investors will earn a $10.2 billion dividend return, they can find dividend stocks that, if held for the long term, will return the original investment back in payouts, perhaps several times over.
The timing may be right for such a strategy. Much like the aftermath of the 1987 stock market crash, numerous stocks trade at a discount in the current bear market.
Additionally, many of these stocks are either Dividend Kings or have increased their dividends annually for several years. Buffett's choice of Coca-Cola shows that investors can apply this strategy to conservative, large-cap stocks and possibly earn outsized dividend returns.
