Investing poorly did not lead to Warren Buffett’s rise to the status of one of the wealthiest individuals in the world. His Berkshire Hathaway holding firm has outperformed the S&P 500, transforming a $1 invested in 1965 into more than $300,000 today.
A $23 billion investment in Coca-Cola (NYSE: KO), which yields $736 million in dividends annually for Berkshire, is the jewel in Buffett’s empire. Buffett’s decades of patience have paid off handsomely in the form of an eye-popping annual payout.
However, excellent firms don’t necessarily make terrific investments for every price point. It could be tempting to try to imitate Coca-Cola’s dividend machine in your own portfolio, but you should weigh the dangers first.
Buffett’s Coca-Cola Fortune Took Decades to Build
It was in 1988 when Warren Buffett initially invested $1 billion in Coca-Cola stock. He would only have 1% ownership in Coke if he attempted to spend $1 billion on the company today. In contrast, his holdings in Coca-Cola ballooned to 400 million shares—more than 9 percent of the total—thanks to decades of increasing dividends.
Buffett received $736 million in dividends from his current Coca-Cola holdings in 2023. That’s the equivalent of receiving a steady stream of cold, hard cash equivalent to his full $1 billion investment year after year.
The power of holding a dividend-growing stalwart like Coca-Cola for 35+ years is immense. However, if you want to reap the same enormous profits as Buffett, you’ll need decades of patience.
Coca-Cola’s Unassailable Competitive Advantages Protect Its Growth
How is Coca-Cola able to consistently pay out dividends? It controls some of the most recognizable consumer brands on Earth as the world’s largest maker of non-alcoholic beverages. They probably don’t own any of these brands, but here they are anyway: Coca-Cola, Sprite, Fanta, Powerade, Dasani, Minute Maid, or maybe not.
Coca-Cola reaches consumers that almost no rival can, thanks to its extensive product line that generates over $1 billion in sales every year. They have a distribution network that reaches far into international marketplaces where newcomers just don’t have a chance.
By purchasing smaller beverage businesses and diversifying its product line, Coca-Cola reinforces its moat. Their expansion parallels that of the world’s population. Profits for Coca-Cola should rise about 6% each year over the next decade, according to analysts.
Healthy Profits Fund Coca-Cola’s 61 Years of Dividend Hikes
More than 75% of Coca-Cola’s net income goes toward paying out dividends to shareholders.
Due to its demand that is resilient to recessions and its low capital expenditure needs, Coca-Cola is able to maintain a high payout ratio of 76%. The profits will keep coming in as long as their items are consumed.
61 years of dividends sends even stronger signals The Coca-Cola dividend is very secure. That dividend increase streak is something the corporation is really proud of. Increasing the dividend each year is fair if the payout ratio is reasonable and profits are constant.
But Warren Buffett Seized a Once-in-a-Lifetime Buying Opportunity
Therein is the dilemma. Coca-Cola is a great dividend stock to own for the long haul, but Warren Buffett really hit it big when he bought it during the market crisis of 1987. Such a steep markdown is unrealistic for modern investors.
Buffett increased his margin of safety by purchasing Coca-Cola stock 30% below its high. In addition to securing a larger yield right away, he would be able to increase his gains from an already-low cost basis through future dividend increases.
However, market downturns that hit blue chip stocks equally are becoming less common. Coca-Cola typically commands a premium price that reflects its reliability and excellence.
Its low beta of 0.58 indicates that it can withstand market downturns with ease. Coca-Cola stock is a safe haven for investors.
Shares Currently Trade at a Lofty Premium
Along with the surging S&P 500 benchmark, Coca-Cola stock is currently flirting with 52-week highs. Due to the historically low interest rates and optimistic market conditions, few investors are concerned about paying too much for security.
In spite of its predicted 6% yearly earnings growth, Coca-Cola commands a substantial premium at a P/E multiple of 22. At a P/E of only 19, the market as a whole is far cheaper.
At current prices, Coca-Cola has substantial long-term return headwinds due to its price-to-earnings-growth (PEG) ratio of roughly 4. Until profits catch up, total yearly returns might have a hard time breaking much higher.
So Should You Buy Coca-Cola Stock for the Growing Dividend?
Coca-Cola is still a great investment for the vast majority of people. As far as income generators go, the corporation itself is among the most dependable. Unfortunately, the stock price is currently disappointing.
There is a lot to love for those who are just concerned with increasing the juice dividend at whatever cost. Having said that, decades of compounding are required before you can anticipate profits comparable to Warren Buffett’s Coke investment.
A more favorable entry position will inevitably arise during a market drop, so investors with more patience may choose to wait for that. Even though it’s highly unlikely to happen anytime soon, Coca-Cola has had a number of drawdowns of 20% or more in the last decade.
Coca-Cola stock’s long-term return prospective becomes much more attractive if it returns to its usual historical P/E range of 15 to 17. In that case, maybe it would be more like the obvious choice Buffett made in 1988.