All three major indexes dipped into bear territory last year, and many top companies saw their share prices sink. Your portfolio may have felt the pain, too. But there is a way to cushion the impact of a tough economy and market on your investments. And that's by following the lead of billionaire investor Warren Buffett and snapping up dividend stocks. They will offer you passive income even if the market is down -- and even if their particular shares are down.
The Oracle of Omaha, as he's often called, collected just north of $700 million from a single company last year. I'm talking about Coca-Cola (KO), a stock Buffett has held for more than three decades. Buffett considers it one of his favorite stocks -- for the strength of its dividend and the overall quality of the company and its earnings. Should you follow Buffett into this top dividend player? Let's find out.
Coca-Cola's 200 top brands
I probably don't have to tell you that Coca-Cola is a beverage giant, selling its eponymous drink in more than 200 countries around the globe. But Coca-Cola isn't just about one beverage. The company actually is present across a wide variety of categories, from juices to coffee and water. As the world's largest nonalcoholic beverage maker, it owns more than 200 major brands including Minute Maid and Dasani.
And that brings me to an important point. Coca-Cola's brand strength, as well as its extensive distribution network, offer it a moat. This is a competitive advantage that keeps the company ahead of rivals and should power earnings growth over the long term. And it's something Warren Buffett is known to appreciate.
Coca-Cola has demonstrated this earnings strength, thanks in part to its moat, over the years even during tough economic times -- such as today's environment. In the most recent quarter, Coca-Cola's revenue and earnings per share increased, and the company gained value share in the total nonalcoholic ready-to-drink beverages market.
Customers come back for the popular drinks they've enjoyed since they were kids -- and Coca-Cola has innovated to meet customers' evolving tastes too, introducing products with lower sugar content, for example.
The company also has increased its operating margin since refranchising its bottling operations back in 2017.
KO Operating Margin (Annual) data by YCharts
A Dividend King
Now, let's move along to the dividend story. Coca-Cola is a member of an elite list known as the Dividend Kings. These are companies that have increased dividend payments for at least the past 50 years. Why is this positive? It shows rewarding shareholders is important to the company, so it's likely it will continue along this path.
Today, Coca-Cola pays out $1.84 per share annually, representing a dividend yield of 3.48%, well surpassing the S&P 500 index's dividend yield. And Coca-Cola's high level of free cash flow -- at about $9.5 billion -- means the company has what it takes to keep increasing and paying a dividend.
So, it's pretty safe to say you can count on Coca-Cola dividend income today and into the future. As Buffett said in last year's shareholder letter, "Growth occurred every year, just as certain as birthdays... We expect that those checks are highly likely to grow."
Is Coca-Cola a buy?
Does all of this mean you should follow Buffett and buy Coca-Cola stock? The answer depends on your investment strategy.
If you're looking for a high-growth stock, Coca-Cola probably isn't the right choice for you. Though the company's growth story is far from over, it still isn't going to deliver the enormous levels we're more likely to see from a newer player with more territory to conquer -- or a dividend stock in a high-growth business like technology, such as Apple.
But if, as part of your investment strategy, you're looking for a solid combination of steady earnings growth, staying power, and dividend increases, then Coca-Cola makes a great stock to buy and hold for the long term. You'll appreciate the passive income no matter what the market is doing -- just like Warren Buffett.
