Warren Buffett's portfolio is filled with strong businesses that have proven themselves over time. Some actually pay shareholders just for owning them -- like dividend stocks. At the helm of Berkshire Hathaway, Buffett has driven a compounded annual gain of more than 19% over 57 years. That's thanks to his careful selection of stocks to buy and hold.
If you're looking for stocks likely to perform well over time, it's a smart idea to turn to Buffett for inspiration. Here are two that make great additions to a portfolio right now: beverage-giant Coca-Cola (KO) and healthcare-heavyweight McKesson (MCK 0.62%). Let's take a closer look at each.
1. Coca-Cola
Buffett bought shares of Coca-Cola over a seven-year period in the late 1980s and early 1990s. Berkshire Hathaway snapped up 400 million shares of the company -- and has held on ever since.
What's to like about Coca-Cola? First, its brand strength has translated into earnings growth. And second, it has a dividend you can count on for passive income year after year.
Let's talk about earnings first. Outside of a period impacted by currency headwinds and costs to refranchise its bottling system, Coca-Cola has generally grown revenue and profit over time. Even during last-year's tough economic environment, Coca-Cola's revenue climbed 11%.
The world's largest non-alcoholic beverage company has seen its free cash flow and return on invested capital increase in recent years.
KO Return on Invested Capital data by YCharts.
Coca-Cola sells its products in more than 200 countries and serves just about every taste -- with waters, coffee, dairy, and plant-based drinks among its list of products. And there's still room for growth.
The company has streamlined its portfolio to 200 key brands and continues to focus on innovation. Coca-Cola sees significant growth potential in the developing world, where only 30% of drinks are commercialized beverages.
Coca-Cola should continue to increase its earnings over time. Meanwhile, investors can pocket annual payments.
The company pays a dividend of $1.84 per share at a dividend yield of 2.90%. Coca-Cola is a Dividend King, meaning it's lifted its annual dividend for at least the past 50 years.
The company's high level of free cash flow is reason to be optimistic that these increases will continue. And that's great news for investors.
2. McKesson
McKesson is a distributor of pharmaceutical products. It offers you the safety of healthcare without the drug-development risk.
Buffett recently sold 11% of his McKesson holding, but that still leaves Berkshire Hathaway with more than 2 million shares of the healthcare company. We don't know exactly why Buffett lowered his McKesson stake, but the stock beat the bear market last year, rising 50%. So some of the company's shareholders could have locked in gains by selling shares.
McKesson still offers investors plenty of opportunity. In fact, it may be entering a new phase of growth because it recently revamped its strategy. McKesson sold off most of its European businesses and has turned its attention to its North American business -- and its highest-growth areas. Those are biopharma services and oncology.
The company continues to expand its U.S. oncology-practice management organization with the addition of new practices to the network. McKesson also is working to better connect doctors and patients to oncology clinical research. That's the goal of its joint venture with HCA Healthcare's Sarah Cannon Research Institute.
As for biopharma services, the company's most recent move was to acquire Rx Savings Solutions. This business helps health plans save money on prescription drugs.
McKesson also has made returning cash to shareholders a priority. For the first nine months of the current fiscal year, McKesson made $216 million in dividend payments and $3.5 billion in common stock repurchases.
Today, McKesson is trading for only about 13 times forward earnings estimates. This looks like an absolute steal, considering the growth potential on the horizon and passive income while you wait.
