Warren Buffett has made a fortune thanks to stock performance -- but something else has added significantly to his gains over the years. That's the billionaire investor's ownership of dividend stocks. These companies have paid him annually, regardless of their performance or the market's performance, ensuring a certain level of guaranteed income.
One stock in particular has been interesting, paying millions of dollars annually since the late 1980s when the Berkshire Hathaway chairman first scooped up the shares. I'm talking about Coca-Cola (KO). In 2022, Coca-Cola paid Berkshire Hathaway $704 million in dividends, up from $75 million back in 1994. Why such an increase? Because the world's biggest non-alcoholic beverage maker has prioritized dividend growth and has a track record of lifting its dividend annually for more than 50 years.
Most of us don't have Buffett's investing budget -- but could this dividend powerhouse still represent a valuable addition to your portfolio? Let's find out.
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A company we all know well
First, a little background on a company most of us know pretty well for one reason. Its products populate our refrigerators, and I'm not just talking about the eponymous drink. When you reach for a Dasani water, a Costa coffee, or a Minute Maid juice, you're about to enjoy a Coca-Cola product. People around the globe are doing the same, because the company sells its beverages in more than 200 countries and territories.
Coca-Cola has a terrific moat, or competitive advantage, and that's its brand strength. Other companies, large and small, make beverages and can even carve out market share, but it's unlikely they'll oust Coca-Cola from the top spot. The company has proven its strength -- for example, it's lifted prices in recent times to combat higher inflation, but revenue continued to climb. So, consumers, even as they watch their budgets, are willing to pay a bit more for their favorite Coca-Cola beverages.
In the most recent quarter, Coca-Cola reported growth in global unit case volume, net revenue, and earnings per share -- and it lifted its full-year earnings forecast. The company also continued to gain value share in the total non-alcoholic ready-to-drink beverages market.
So you can count on Coca-Cola for earnings strength over time, and this is key because it ensures the company's ability to continue growing dividends. The beverage giant has increased free cash flow to about $10 billion, and the cash dividend payout ratio shows that, in recent years, it's generally paid out about 72% to 84% of free cash flow in the form of dividends.
Coca-Cola pays a dividend of $1.84 a share, representing a dividend yield of 3.02% -- surpassing the 1.47% dividend yield of the S&P 500.
Passive income you can count on
Now, let's get back to our question. Warren Buffett loves this top dividend player, but should you? Even if your investment in this beverage powerhouse doesn't bring in hundreds of millions of dollars in dividends, it still could offer you a very satisfactory level of passive income that you can count on. Coca-Cola's earnings strength and its commitment to dividend growth over the years mean it's likely the company will continue increasing its dividend payments. These can add to your winnings in good times and minimize your losses in difficult market environments.
As we can see in the chart below, showing total returns, dividend payments can add significantly to your gains over time.
Now, let's look at another point Buffett considers important, and that's valuation. Today, Coca-Cola trades for 21 times forward earnings estimates, down from about 24 a year ago. Even at last year's levels, the price looked reasonable considering the company's market leadership and passive income growth potential -- but today if you buy the stock, you're getting a real bargain.
All this means that, even if you don't generate as much passive income as Buffett, you still can score a big win year after year by investing in this top dividend stock.
