Thursday, July 3, 2014

How to earn $900 in dividend income per minute

On July 1, Buffett’s Berkshire Hathaway (BRK.B) received $122 million dollars in dividend income from their 400 million shares of Coca-Cola (KO). This comes out to roughly $928 dollars in dividend income for Berkshire Hathaway every minute, or almost $15.47 every single second. Those shares have a cost basis of $1.29 billion dollars, and were acquired between 1988 – 1994. The annual dividend payment produces an yield on cost of over 37.50%. This doesn’t assume dividend reinvestment and is 4 – 5 times higher than what investors in 30 year US Treasuries would be earning. This is why I believe that Warren Buffett is a closet dividend investor.

This is a testament to the power of long-term dividend investing, where time in market is the investors best ally, not timing the market. If you can select a business which is run by able and honest management, which has solid competitive advantages, and which is available at a good price today, one needs to only sit and let the power of compounding do the heavy lifting for them. As Buffett likes to say, time is a great ally for the good business. In the case of Coca-Cola, the past 26 years have been a great time to buy and hold the stock. The company has been able to tap emerging markets in Eastern Europe, Asia, Africa and Latin America like never before. As a result, it has been able to receive a higher share of the worldwide drinks market, which has also been expanding as well. If you add in strategic acquisitions, new product development, cost containment initiatives and streamlining of operations, you have a very powerful force for delivering solid shareholder returns. With dividend investing your are rewarded for smart decisions you have made years before.

If they closed the stock market for a period of 10 years, Coca-Cola would be one of the companies I would be willing to hold on to. This is because ten years from now, the company would likely be earning double what it is earning today, and would likely be distributing twice as much in dividend income than it is paying to shareholders today. Check my analysis of Coca-Cola for more information.

At the end of the day, if you identify a solid business, that has lasting power for the next 20 – 30 years, the job of the investor is to purchase shares at attractive values, and hold on to it. This slow and steady approach might seem unexciting initially, but just like with the story of the slow-moving tortoise beating the fast moving hare, the power of compounding would work miracles for the patient dividend investor.

Currently, Coca-Cola is selling for 20.20 times forward earnings and yields 2.90%. This dividend champion has managed to increase dividends for 52 years in a row. Over the past decade, Coca-Cola has managed to increase dividends by 9.80%/year, equivalent to dividend payments doubling every seven years. This is much better than the raises I have received at work over the past decade, despite the fact that I have routinely spent 55 - 60 hour weeks at the office.

Full Disclosure: Long KO and one share of BRK.B

Relevant Articles:

Coca-Cola: A wide-moat dividend growth stock to buy and hold
Warren Buffett Investing Resource Page
Seven wide-moat dividends stocks to consider
Warren Buffett’s Dividend Stock Strategy
The importance of yield on cost

2 comments:

  1. I bought holdings in Coke and they are showing an increase of 20%. I also look forward to the dividend raises. It is just a portfolio must have.
    I love the following from Charlie Munger and Coke fits into this.

    "Over the long term, it's hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you're not going to make much different than a six percent return - even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result."

    Beet wishes

    Louis Gunn

    ReplyDelete
  2. That's a lot of dividends! It'll probably be $2000 per minute in a decade or so. Good stuff!

    ReplyDelete

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