You can do it. I can do it. Anyone can do it.
The investing strategy responsible for Warren Buffett’s remarkable wealth is that easily replicated.
Any investor can incorporate Buffett’s wealth-generating strategy for his own gain. It involves no complicated algorithms or insider connections.
The strategy centers on only two principals: time and a stock.
Time is the same for everyone. Time is parsed to each of us in equal amounts every day.
The stock component is less egalitarian. It requires some finagling. It must be the right stock. But that, too, is easy enough to conjure.
A proven dividend-growth stock.
Combine time with a proven dividend-growth stock and you’re on the path to creating remarkable wealth like Warren Buffett.
The Coca-Cola Dividend
Buffett’s Coca-Cola (NYSE: KO) investment offers ready proof of the power and simplicity of combining time with a proven dividend-growth stock.
Coca-Cola has grown its dividend annually for the past 56 years. Buffett hasn’t owned Coca-Cola shares for the full 56 years, but he’s owned them long enough.
Buffett began accumulating Coca-Cola shares for Berkshire Hathaway (NYSE: BRK.b) in 1987. He bought the largest chunk of Berkshire’s Coca-Cola investment in 1988 with a $1 billion purchase.
We can reasonably assume Buffett paid an average of $2.50 per share (split-adjusted) for his Coca-Cola shares. This is reasonable given Coca-Cola’s trading range in late 1987 and 1988. The split-adjusted annual dividend was $0.08 per share three decades ago.
Coca-Cola has increased its dividend annually over the subsequent 32 years. Coca-Cola pays $1.56 per share in annual dividends today. (The annual dividend will be increased again in the first quarter.)
When Buffett first bought his Coca-Cola shares, the dividend generated a 3% yield. Coca-Cola’s annual dividend today generates a 3% yield on the market price.
But the $1.56 annual dividend today generates a 62% yield on Berkshire’s cost basis.
What’s more, the 62% is as close to guaranteed as you can get. That dividend yield is sure to rise every year going forward.
Coca-Cola increases its dividend roughly 6% annually. If Coca-Cola continues to increase its dividend 6% annually, Berkshire Hathaway will receive $2.50 in annual per-share dividends by 2026.
Berkshire will soon own a Coca-Cola investment that generates a 100% annual return. Berkshire will realize a 100% (and more) annual return on its Coca-Cola investment regardless of Coca-Cola’s market share price.
Berkshire will realize even more return.
History has proven that as the dividend goes, so goes the share price. This is true of Coca-Cola’s share price over Berkshire’s holding period.
Coca-Cola’s annual dividend increased to generate a 62% annual yield on Berkshire’s cost basis. Coca-Cola’s market value has increased to be worth 19 times Berkshire’s cost-basis price.
You might think that Coca-Cola is an extraordinary outlier example. It’s not so.
Berkshire’s top 10 stock holdings (Coca-Cola is one) account for 80% of its stock-portfolio value.
Every one of the top 10 holdings is a dividend-growth stock. Every one of the holdings shows a similar dividend and share-price trajectory as Coca-Cola.
The top five holdings – Apple (NASDAQ: AAPL), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Coca-Cola (NYSE: KO), and Kraft Heinz (NASDAQ: KHC) – account for 65% of Berkshire’s portfolio value. These investments alone generate $3.8 billion in annual for Berkshire.
The annual dividends these five companies pay Berkshire Hathaway are sure to exceed $4 billion annually when we head into 2020. Barring a major market correction, the market value of these top 10 holdings in 2020 will likely exceed the market value today
There you have it: time and the right dividend-growth stock. Combine the two and you’ll be generating wealth like Warren Buffett sooner than you expect.