I have a nearly unquenchable thirst for passive income. I desire to collect an ever-growing stream of passive income to help me achieve financial independence. That's leading me to steadily buy more dividend-paying stocks to help satisfy my thirst for income.
One dividend stock I have been buying lately is Coca-Cola (KO -1.00%). This beverage giant is a top holding of Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), with a magnificent track record of paying dividends. Here's why I believe it's a great dividend stock to buy and hold.
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Dividend royalty
In early 2025, Coca-Cola raised its dividend by 5.2%, marking 63 consecutive years of increases. This achievement keeps the company among the elite Dividend Kings -- businesses with 50 or more years of consecutive annual dividend increases. Coca-Cola pays out more than $8 billion in annual dividends and has distributed nearly $100 billion to shareholders via dividends since 2010.
The company's growing dividend has really added up over the decades. This is evident in the dividend income Berkshire Hathaway collects from Coca-Cola each year. Berkshire Hathaway currently owns 400 million shares, or about 9.3% of Coca-Cola's outstanding shares. This position is worth $26.7 billion, making it Berkshire's fourth-largest holding at 8.7% of its investment portfolio. Berkshire currently collects over $800 million in dividend income from Coca-Cola each year. This is notable considering Berkshire only paid about $1.3 billion for the position in the late 1980s and early 1990s. The company earns more dividend income each year as Coca-Cola raises its dividend payment.
Coca-Cola's dividend currently yields over 3%. That's more than double the S&P 500's dividend yield, which is near a record low at less than 1.2%. At that rate, every $100 I invest in Coca-Cola can generate over $3 of annual dividend income that should steadily rise.
Plenty of pop is still left
The iconic beverage company should be able to continue increasing its dividend in the coming years. Coca-Cola owns an impressive portfolio of beverage brands that generate durable and growing cash flow. The company generated $10.8 billion of adjusted free cash flow after capital expenditures last year, excluding the impact of an IRS tax litigation deposition. That gave it a 73% dividend payout ratio, which is comfortable for a company with Coca-Cola's strong financial profile. While the company expects its adjusted free cash flow to be lower this year at $9.5 billion (excluding a contingent payment related to its 2020 Fairlife acquisition), that's still more than enough cash to cover its current dividend level.
The company further backs its dividend with its strong A-rated balance sheet. Coca-Cola ended the second quarter with $14.3 billion of cash, cash equivalents, short-term investments, and marketable securities on its balance sheet. The company also had a low 2.0 times leverage ratio. That's right at the low-end of its 2.0x-2.5x target range, giving it ample capacity to take on more debt if needed.
Coca-Cola's strong cash flows and fortress balance sheet enable it to continue investing to grow its business. The company spends about $2 billion annually on capital expenditures to maintain and expand its operations. This reinvestment rate supports Coca-Cola's long-term goal of delivering 4%-6% annual organic revenue growth and 7% to 9% annual earnings-per-share growth.
The company's ample balance sheet capacity allows it to make strategic acquisitions that enhance its growth profile. Since 2016, acquisitions such as Fairlife, Costa Coffee, Bodyarmor, and Topo Chico have contributed a quarter of Coca-Cola's earnings-per-share growth.
Coca-Cola's combination of financial strength and healthy long-term growth profile puts the company in an excellent position to continue increasing its dividend in the years to come.
An excellent income stock
Coca-Cola has done a magnificent job increasing its dividend over the years. That steady dividend growth has really paid off for long-term investors, such as Warren Buffett's Berkshire Hathaway. Coca-Cola is in a strong position to continue increasing its high-yielding payout in the future. That's why I'm adding to my position to collect even more of Coca-Cola's steadily rising dividend income.
