For nearly six decades, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has dazzled Wall Street with his investing prowess. Since taking over as CEO in 1965, the Oracle of Omaha has overseen a greater than 4,200,000% aggregate increase in his company's Class A shares (BRK.A), which compares to a less than 30,000% total return, including dividends, for the benchmark S&P 500 over the same time frame.
What's remarkable about Warren Buffett's investment philosophy is that it's relatively simplistic. While there are a lot of working components, such as buying with a long-term mindset and seeking out brand-name businesses with trusted management teams, it's a strategy that can be tailored for everyday investors.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
However, the one aspect of Buffett's investment strategy that's not been given nearly enough credit for his long-term outperformance is his love of dividend stocks. Companies that pay a regular dividend are almost always profitable on a recurring basis and can offer transparent long-term growth outlooks.
Further, income stocks have absolutely crushed non-payers in the return column over long periods. A 2013 report from the wealth management division of JPMorgan Chase found that companies initiating and growing their payouts between 1972 and 2012 averaged a 9.5% annualized return. As for the non-payers, they trudged their way to an annualized return of just 1.6% during the same stretch.
But the Oracle of Omaha doesn't just buy any old dividend stocks. He's packed Berkshire Hathaway's portfolio with a number of income stocks that have lengthy streaks of raising their base annual payout. In fact, three Berkshire holdings are Dividend Kings -- public companies that have raised their base annual payouts for at least 50 consecutive years.
In aggregate, Warren Buffett has $21 billion riding on three Dividend Kings in Berkshire Hathaway's $337 billion portfolio.
Coca-Cola: $20.95 billion in invested assets
The biggest bet on a Dividend King by Warren Buffett is, unquestionably, beverage stock Coca-Cola (KO).
Coca-Cola has increased its base annual dividend for 61 consecutive years. More impressively, Berkshire Hathaway's $3.2475-per-share cost basis on Coca-Cola equates to a yield relative to cost of almost 57% annually! In plainer English, Buffett's company is more than doubling its $1.3 billion initial investment on Coca-Cola from the dividend payout alone every two years.
The two factors that make Coca-Cola such a rock-solid income stock are its cash flow predictability and its top-notch marketing.
With regard to the former, Coca-Cola is one of the most-recognized consumer staples brands in the world. According to the annually released Brand Footprint report from Kantar, it's been the most-chosen brand by consumers for the past decade, as of the 2022 report.
Coke has operations in all but three countries worldwide (North Korea, Cuba, and Russia), which means it's generating highly predictable operating cash flow in developed markets, while reaping the rewards of higher organic growth rates in emerging countries. It also has 26 brands in its vast product portfolio that are generating at least $1 billion in annual sales.
Coca-Cola's marketing is also difficult to top. The company is spending more than half of its advertising budget in the digital arena and leaning on artificial intelligence (AI) to tailor ads that'll help it connect with a younger audience. Meanwhile, it can rely on its legacy holiday tie-ins and well-known brand ambassadors to connect with its mature consumers. Few consumer goods brands can more easily transcend generational gaps than Coca-Cola.
Johnson & Johnson: $51.4 million in invested assets
The second Dividend King Warren Buffett is betting on in Berkshire Hathaway's $337 billion portfolio is healthcare conglomerate Johnson & Johnson (JNJ -0.46%), which is commonly referred to as "J&J." Like Coca-Cola, J&J has increased its base annual payout for 61 straight years.
One thing that makes Johnson & Johnson particularly special is that it's one of only two publicly traded companies to bear the highest credit rating (AAA) from Standard & Poor's (S&P), a division of S&P Global. This rating, which is one notch higher than the credit rating bestowed on the U.S. government, demonstrates the unwavering faith S&P has in J&J to service and eventually repay its outstanding debts.
Prior to the COVID-19 pandemic, J&J had increased its adjusted operating earnings for an impressive 35 consecutive years. It's been able to sustain this growth by shifting more than half of its net sales to pharmaceuticals, which offer substantially juicier margins and considerable pricing power, relative to medical devices.
It's also worth pointing out that healthcare companies are defensive. Regardless of how well or poorly the U.S. economy performs, people will continue to need prescription medicines and medical devices. Since we don't get the luxury of choosing when we get sick or what ailment(s) we develop, there's a pretty safe floor beneath J&J's operating cash flow every year.
Another reason for Johnson & Johnson's long-term success is its leadership. In the 137 years since the company was founded, J&J has had just eight CEOs, including current CEO Joaquin Duato. Having predictability at the top has allowed J&J to successfully adapt to an ever-changing healthcare landscape.
With a modest payout ratio of 47% (based on Wall Street's consensus earnings per share for J&J in 2023), Johnson & Johnson shouldn't have any trouble building on its 61-year streak of consecutive payout increases.
Image source: Getty Images.
Procter & Gamble: $45.4 million in invested assets
The third Dividend King that, collectively with Coca-Cola and Johnson & Johnson, accounts for around $21 billion worth of Berkshire Hathaway's invested assets is consumer staples behemoth Procter & Gamble (PG -0.78%), which is also known as "P&G." in April, P&G increased its payout for a 67th consecutive year.
One of the key reasons P&G has been able to deliver steady dividend growth for two-thirds of a century (and counting) is because it sells basic necessity goods. Although consumers can pare back their discretionary purchases during periods of uncertainty, things like detergent, toilet paper, toothpaste, and a host of other goods that P&G provides, are going to be purchased in any economic climate. This leads to predictable operating cash flow year in and year out.
Procter & Gamble is also working with exceptional pricing power. Since many of its brands are well-known (e.g., Tide, Bounty, Crest, Gillette, Dawn, and so on), P&G has had little trouble passing along price hikes to consumers. In fiscal 2023, which came to a close on June 30, 2023, P&G was able to more than offset a 1% decline in volume and a 3% adverse impact from foreign currency exchange with a 7% price hikes across its various product segments.
P&G is unmatched when it comes to advertising spending, as well. The roughly $8.1 billion P&G devoted to ad spending in 2021 was $3.3 billion more than the No. 2 company, Amazon. Spending billions of dollars each year on advertising helps Procter & Gamble drive home the value of its brands with consumers. Sustaining and/or building on its brand value allows P&G to fight back against cheaper store-based brands.
Similar to Coca-Cola and J&J, there's also plenty of runway for Procter & Gamble to continue raising its dividend. Based on Wall Street's consensus earnings per share in fiscal 2024, P&G is doling out just 59% of its earnings in the form of a dividend. While the payout growth won't exactly be jaw-dropping, P&G shouldn't have any trouble sustaining its exceptionally long streak of growing its dividend each year.
