Buffett’s net worth has swelled to $80.5 billion as of this past weekend. This figure doesn’t factor in the $37 billion he’s donated to various charities over the past 14 years.
The Oracle of Omaha has also created $400 billion in value for shareholders. In the past 55 years, the benchmark S&P 500 has gained 19,784%, inclusive of dividends paid, while Berkshire Hathaway stock is up 2,744,062%.
Dividends have played a key role in Buffett’s long-term success
Warren Buffett has always been excellent at identifying businesses with clear-cut and sustainable competitive advantages, and he’s benefited from holding onto these businesses for long periods of time. He’s also quite the fan of value stocks.
But there’s one factor in Buffett’s success that doesn’t get nearly the attention it deserves: his affinity for dividend stocks. The vast majority of companies that pay a dividend are profitable on a recurring basis and have time-tested business models.
Dividend stocks have historically run circles around peers that don’t pay dividends. In 2013, Bank of America/Merrill Lynch released a report comparing the average annual return of stocks that initiated and grew their payouts between 1972 and 2012 with the average annual return of stocks that don’t pay dividends. The result was night and day. Dividend-paying stocks averaged a 9.5% annual increase, while nonpayers only managed an average bump of 1.6% per year over this four-decade stretch.
However, Buffett has an extra advantage when it comes to dividend stocks. Because the Oracle of Omaha invests for the very long term, his initial cost basis on long-held stocks can be quite low. If brand-name companies keep growing their payouts, the time it takes for Buffett to double his money, based on Berkshire’s initial cost basis, shrinks.
For each of the following three stocks, Buffett can double his money in anywhere from two to five years.
Perhaps it comes as no surprise that Berkshire Hathaway’s longest-tenured holding also happens to be one of its most robust moneymakers.
Beverage giant Coca-Cola (NYSE:KO) has been a staple in Buffett’s portfolio since 1988, with the Oracle of Omaha’s company boasting an initial cost basis of $3.245 per share. Coca-Cola pays out $1.64 per share in dividends, so Berkshire Hathaway’s yield on original cost is a mouthwatering 50.5%. Put another way, Berkshire is doubling its initial investment on dividends alone every two years. Coke has also increased its base dividend for 58 consecutive years.
If you’re wondering why Coca-Cola has been such a successful investment, look to the company’s geographic reach. With the exception of North Korea and Cuba, it operates in every country around the world. It has a solid 20% share of the cold beverage market in developed countries, but has plenty of…