For nearly six decades, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has been putting on a master class for Wall Street. Since he took the reins in 1965, Berkshire's Class A shares (BRK.A) have been double the annualized total return, including dividends paid, of the benchmark S&P 500.
What investors tend to really appreciate about the Oracle of Omaha -- aside from riding his coattails to substantial gains -- is his willingness to openly share his investment philosophy and thoughts on the U.S. economy and stock market. Buffett's penchant for buying cyclical, brand-name businesses with highly trusted management teams has worked out well for more than a half-century.
But some of the more unheralded heroes of Warren Buffett's $341 billion investment portfolio are its dividend stocks.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Berkshire Hathaway will collect more than $6 billion in dividend income over the next year
Companies that offer a regular payout to their shareholders typically have a number of favorable traits. Income stocks are usually profitable on a recurring basis, provide clear and transparent long-term growth outlooks to their shareholders, and have often demonstrated their ability to navigate challenging economic climates.
Dividend stocks also have an extensive history of outperformance, when compared to publicly traded companies that don't pay a dividend to their shareholders. According to a report released in 2013 from the wealth management division of JPMorgan Chase, companies that initiated and increased their payouts between 1972 and 2012 produced an annualized return of 9.5% over 40 years. Meanwhile, the non-payers delivered a disappointing annualized return of just 1.6% over the same time frame.
Berkshire Hathaway holds in the neighborhood of three dozen dividend stocks in its portfolio, with Buffett's company set to collect in excess of $6 billion in dividend income over the next 12 months. While many of Berkshire's holdings have very modest nominal yields (Apple has just a 0.55% yield), there is a high-yield stock or two sprinkled in.
For example, money-center bank Citigroup (C 1.41%), which is a $2.2 billion position in Berkshire Hathaway's portfolio, is doling out a 5.1% yield at the moment. Bank stocks are benefiting from a higher-interest-rate environment, which has increased the net-interest income they're generating on variable-rate loans.
Berkshire Hathaway's dividend yield relative to cost on shares of Coca-Cola is a jaw-dropping 57%. Image source: Coca-Cola.
Time is a big-time ally of income investors (and Warren Buffett)
Although Citigroup has a yield that more or less matches the annual payout of most short-term U.S. Treasury bills, it's far from the highest true yield in Berkshire Hathaway's portfolio. The Oracle of Omaha is collecting a 57% annual yield on beverage stock Coca-Cola (KO), a 31% yield each year on credit-rating agency Moody's (MCO 0.25%), and a 28% annual yield on credit-services company American Express (AXP -0.62%). Buffett's secret to generating these massive yields is a combination of patience and time.
In order, Coca-Cola, American Express, and Moody's are the three longest-held stocks within Berkshire Hathaway's portfolio. Coke shares have been continuously held since 1988, while AmEx and Moody's have been consistent holdings since 1993 and 2000, respectively. Because these companies have been held for so long, Berkshire Hathaway's cost basis on these stocks is exceptionally low.
Based on Warren Buffett's 2021 annual letter to Berkshire Hathaway's shareholders, Coca-Cola, Moody's, and American Express have cost bases of $3.2475 per share, about $10.05 per share, and roughly $8.49 per share, respectively. Given that Coca-Cola, Moody's, and American Express offer respective annual payouts of $1.84 per share, $3.08 per share, and $2.40 per share, Buffett's company is enjoying yields relative to cost of 57%, 31%, and 28%. There's absolutely no incentive for Buffett or his investment team to ever sell these stakes, which are absolutely crushing the nominal inflation rate every year and generating robust real-money returns.
What's so impressive about the yields on cost Warren Buffett's company is generating is that everyday investors can do the very same thing with their own portfolios, when given enough time. While you're probably not going to net a 57% yield on Coca-Cola, there are plenty of high-quality companies to buy that can offer a combination of share-price appreciation and a growing dividend.
An under-the-radar example is water utility York Water (YORW). York is a regulated utility that provides water and wastewater services in 54 municipalities spanning three counties in South-Central Pennsylvania. Regulated utilities provide highly predictable operating cash flow, especially when you consider that demand for water and wastewater services doesn't change a lot from one year to the next.
What makes York special is the steady growth of its operations via bolt-on acquisitions, as well as the recent rate increase granted by the Pennsylvania Public Utility Commission. The $13.5 million in added revenue York will bring in annually from this rate hike increases its top line by about 22%.
Furthermore, York Water has paid a consecutive dividend for 207 years, which is the longest streak of any public company by about six decades. Buying and holding a gem like this over multiple decades could lead to a supercharged yield on cost.
York Water is just one example of the power of compounding in the dividend arena. Everyday investors with time on their side can follow in Warren Buffett's footsteps and, eventually, generate supercharged income of their own.
