Warren Buffett isn't an income investor, but he could be. The iconic investor has led Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) to buy many dividend stocks that generate significant income. Berkshire's position in Apple alone made $785 million in dividends in 2021.
Apple is Berkshire's largest holding by far. But there are other stocks in which the conglomerate has smaller stakes that generate huge levels of income on a per-share basis. Here's how Buffett receives a staggering 54% dividend yield from one Dividend Aristocrat.
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Not a typo
The Dividend Aristocrat that I'm referring to is Coca-Cola (NYSE: KO). And no, Buffett's dividend yield mentioned isn't a typo. It truly is 54% and not 5.4%.
But isn't Coca-Cola's dividend yield only around 3.2% right now? Yes, that's its correct current yield. However, the jaw-dropping number that Buffett receives is an effective dividend yield.
What's the difference between a run-of-the-mill dividend yield and an effective dividend yield? The former is based on the current share price of a stock. The latter, though, is based on a given investor's cost basis for the stock. The cost basis is the amount paid to purchase the stock, adjusted for any stock splits.
Berkshire Hathaway's cost basis for Coca-Cola is only $3.25 per share. Buffett first invested in the soft drink giant way back in 1988.
At the time, Coke's annualized dividend payout was $0.075 a share, adjusted for stock splits. Today, the annualized dividend is $1.76. Buffett's effective dividend yield, therefore, is nearly 54.2% (annual dividends of $1.76 divided by the cost basis of $3.25.)
Two factors working to Buffett's advantage
The main reason Buffett enjoys such a colossal effective dividend yield with Coca-Cola is that he's held on to the stock. He has stated before that his favorite holding period is "forever." He's living up to this ideal with Coke, sticking with the stock for 34 years.
But time would only be on Buffett's side from an income standpoint if Coca-Cola increased its dividend during the period. The company did just that, of course, with its payout skyrocketing by a multiple of nearly 23.5.
Could Buffett have known in 1988 that Coca-Cola would increase its dividend so much? He probably wouldn't have been able to predict how much the dividend would grow. However, he almost certainly could have been able to confidently forecast that Coke would steadily increase its dividend each year.
Coca-Cola was already a Dividend Aristocrat back then. Companies that have long track records of dividend hikes usually place a high priority on keeping the streak going. Today, Coke has increased its dividend for 60 consecutive years, making it a Dividend King.
Following Buffett's example
Buffett hasn't bought Dividend Aristocrats and held them for long periods very often. Aside from Coca-Cola, Berkshire Hathaway's portfolio includes only two other Dividend Aristocrats, Johnson & Johnson and Chevron. (Buffett's "secret portfolio" -- stocks held by Berkshire subsidiary New England Asset Management and not managed by Buffett -- currently includes 31 Dividend Aristocrats.)
As mentioned earlier, Buffett isn't an income investor. His approach in this case, though, could be helpful for other investors hoping to one day retire with significant dividend income.
Any stock that's likely to significantly increase dividends should work with the strategy. Coca-Cola is certainly an outlier, but income investors could realistically achieve exceptionally high effective dividend yields over time with other stocks by following Buffett's example.
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Keith Speights has positions in Apple and Berkshire Hathaway (B shares). The Motley Fool has positions in and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
