Given that Warren Buffett's favorite holding period is forever, dividends have played a big role in the performance of Berkshire Hathaway's stock portfolio. The conglomerate is set to rake in over $6 billion in dividend income this year from its myriad holdings.
Two of Buffett's favorite dividend stocks are Apple (AAPL 0.58%) and Coca-Cola (KO 0.15%). Collectively, these two stocks account for around $1.5 billion of Berkshire's annual dividend income. While dividend investors shouldn't blindly copy Buffett, both stocks have a lot going for them.
Apple
iPhone giant Apple is, by far, the largest position in Berkshire Hathaway's stock portfolio, accounting for nearly half of its total value. As of March 31, the conglomerate owned about 915 million shares of Apple, worth approximately $158 billion.
Apple took a long break from paying dividends from 1995 through 2012, but the unprecedented success of the iPhone generated so much cash that Apple could easily afford to resume shareholder payouts. The company has grown its quarterly dividend over the past decade, although it's been fairly conservative about it. Apple bumped up the quarterly dividend to $0.24 per share earlier this month, a 4% increase.
Based on that new payment, Apple stock sports a dividend yield of just 0.56%. That's much less generous than many of its tech-giant peers. But once you factor in share buybacks, Apple returns a prodigious amount of cash to shareholders. In the six months that ended April 1, Apple sent $7.4 billion to investors in the form of dividends and spent another $39 billion on share buybacks.
Over the years, share buybacks have greatly reduced Apple's share count. The company's diluted share count stood at 15.8 billion at the start of April, down from a peak of nearly 27 billion in 2013. For all shareholders, including Buffett, Apple's prolific buybacks have increased the percentage ownership of the company.
While the company's dividend is somewhat stingy right now, there's plenty of room for it to grow over time. Free cash flow over the six months ended April 1 totaled $55.8 billion, putting the dividend-payout ratio at a measly 13%. Even if free-cash-flow growth is minimal, Apple should be able to grow the dividend for many years to come.
Buffett has hundreds of billions of dollars that must be put somewhere, so it makes sense that he would gravitate toward Apple. The company has major competitive advantages, particularly the utter dominance of the iPhone, and it generates far more cash than it knows what to do with. The stock isn't cheap relative to earnings, but it makes a lot of sense for Berkshire's portfolio.
Coca-Cola
Berkshire has owned a major stake in beverage-giant Coca-Cola for decades. Buffett first invested in the company back in 1988 when stock prices were depressed, and that investment has paid off handsomely in the ensuing years.
Since the beginning of 1988, shares of Coca-Cola have soared about 2,550%. But that's only part of the story.
Coca-Cola has been paying dividends for a very long time and has increased its dividend annually for 60 years in a row. The power of the company's brands fuels its results through good times and bad, allowing it to return an ever-increasing amount of cash to shareholders.
Coca-Cola's total return since the start of 1988, which factors in dividend payments, was an astounding 5,930%. That's more than double the gain when excluding the impact of dividends. The company's most recent quarterly dividend of $0.46 per share works out to a yield of 2.9%, far higher than that of the S&P 500.
Coca-Cola's growth remains solid, even as a tough economy puts pressure on consumers. Global unit case volume grew 3% year over year in the first quarter, and organic revenue jumped 12%. The company was able to pass off price increases to its customers without issue, a testament to the strength of its brands.
Coca-Cola isn't going to be dethroned in the world of soft drinks, at least not anytime soon, and the company's broad catalog of products protects it a bit from any changes in consumer behavior. In addition to its iconic Coca-Cola brand, the company sells bottled water, sparkling water, sports drinks, milk, coffee drinks, and juice.
While Coca-Cola stock is unlikely to replicate its amazing performance since Buffett first bought in, it's well-positioned to continue dominating the beverage industry and return substantial cash to shareholders in the process.
