Warren Buffett is an investing legend because his holding company, Berkshire Hathaway, has beaten the market by a wide margin over a long period of time. He also has sage advice that he gives out freely, and some great quips that investors live by.
One of his favorite investing features is dividends. Companies that pay dividends are typically well-established industry leaders that are highly focused on cash generation and shareholder value, and while they're not usually growth stocks, these qualities lead to steady long-term gains for investors. Plus, if you start investing early and reinvest your dividends, compounding turns them into incredible assets.
Buffett mentioned two of his favorite stocks in his most recent shareholder letter, sharing how they contributed more than $1 billion to the portfolio in 2022 alone. Let's examine how this works and why these two great companies are still investment-worthy choices.
The classic Dividend King
Coca-Cola (KO +0.39%) is Buffett's longest-held stock. He finished buying shares in 1994, nearly 30 years ago. At the time, the total cost was $1.3 billion, and that year, the dividend was $75 million. In 2022, between stock growth and dividend increases, the dividend came to $704 million.
Buffett still expects the stock and its dividend to grow. Coca-Cola is a classic Dividend King, increasing its dividend annually for the past 61 years. It's a cash-generation machine, and it has paid and raised its dividend through thick and thin.
NYSE: KO
Key Data Points
Besides being reliable for dividends, Coca-Cola is a beverage industry leader with unmatched name recognition and a marketing system that keeps it on top. It continues to grow sales and report high profits, and it has growth opportunities both in organic industry growth and capturing market share. Investors should expect stable and reliable growth for many years from Coca-Cola stock.
The premium credit card business
The second stock Buffett spoke about is American Express (AXP 0.48%). He finished buying shares in 1995; the shares were also worth $1.3 billion. The annual dividend has grown from $41 million then to $304 million in 2022.
Consumer goods and banks are probably Buffett's two favorite industries, and while Coca-Cola is an example of a top consumer goods stock, American Express is a great example of a top financial stock. Buffett loves such companies because they're flush with cash, and he has plenty of money invested in traditional banks like Bank of America.
American Express stands out because it's more than a bank; it's a strong brand name with loyal customers who pay annual fees that go straight to the bottom line in a recurring revenue stream. That feeds into a cash and profitability loop that gets even stronger as the company reinforces its brand with premium products that attract its core clientele.
NYSE: AXP
Key Data Points
Buffett also sees more increases ahead for American Express stock, and its recent performance indicates that can continue. Despite inflation all around, revenue increased 13% over last year, and earnings per share rose from $2.47 last year to $3.30 this year. The affluent consumer remains resilient, and American Express benefits from that tailwind in any economic climate.
Buy dividend stocks
There's nothing wrong with buying growth stocks, and many investors are very successful with that strategy. But even growth investors shouldn't discount the benefits of investing in dividend stocks; they present their own growth opportunities, and, at the very least, create ballast for a stock portfolio that could be tethered too strongly to high-risk opportunities.
Buffett says, "Over time, it takes just a few winners to work wonders." That's one of the main reasons to have a diversified portfolio. The winners more than make up for the so-so stocks or losers. He drolly adds, "And, yes, it helps to start early and live into your 90s as well." If you buy dividend stocks and let them appreciate as well as give you passive income, you could end up with some serious gains.
