﻿How Warren Buffett Doubles His Money With Dividends
Hook- Warren Buffett is widely considered
one of the greatest investors of all time, with a staggering net worth of $80 billion dollars.
If you’re a fan of the channel, then you know I like to learn from the experience of Buffett and
his partner Charlie Munger. Much of their success comes from investing in companies with sustainable
competitive advantages and holding them long term. Although his company, Berkshire Hathaway, chooses
not to pay a dividend, a significant number of their holdings do. In fact, his investments
are generating more than $4 billion dollars a year in dividend income. Throughout this video,
I’m going to explain how Buffett’s massive cash flow let’s him consistently double his money on
many stocks. Intro -
My name is Zach and you should leave a like and subscribe to the channel if you enjoy the video.
Today, I want to show you how Warren Buffett’s long term investing strategy generates significant
dividend income with huge yields on cost. Content-
Warren Buffett is what’s known as a value investor. This investment strategy involves
picking stocks that are trading for less than their intrinsic or book value. However,
his strategy evolved overtime, with a great deal of influence from Charlie Munger:
Play clip This transition to focusing
on the quality of the underlying business was learned through their investment in See’s Candy.
Play clip Now I’ll tell you exactly
why walking away from See’s Candy would have been a terrible idea. In 1972, they bought the entire
company for $25 million dollars. That year, the business had $31 million in sales and made $2.083
million in profits after taxes. Additionally, the business needed a working capital of $8 million
to operate. Based on Buffett’s valuation of See’s he was unwilling to pay more than the $25 million
he offered. That would have proved to be an idiotic decision. As of 2007, See’s Candy has
earned Berkshire Hathaway $1.35 Billion dollars in pre-tax earnings. Additionally that year,
See’s sales were $383 million, netting over $82 million in pre-tax profit. So Buffett is well
over tripling his initial investment in See’s candy every single year. Based on this, it was
totally irrelevant whether they paid $100,000, $1 million, or heck even $10 million more.
In 2019, Buffett said that See’s has produced well north of $2 Billion dollars
in pre-tax earnings and the chocolate company remains a cash cow for Berkshire Hathaway.
See’s Candy exemplifies what Buffett looks for in a business. The company has built
a competitive advantage through significant brand and customer loyalty. Buffett has said
“Long-term competitive advantage in a stable industry is what we seek in a business”.
“If that comes with rapid organic growth, great. But even without organic growth,
such a business is rewarding. We will simply take the lush earnings of the business and use
them to buy similar businesses elsewhere.” This is exactly what he did with See’s Candy. The company
had limited potential for scaling, but was able to provide a reliable cash flow. This mindset
of buying great businesses at fair prices would bleed into all of Buffett’s future investments.
Warren Buffett does not specifically target dividend stocks, yet the majority of his holdings
pay dividends. This correlation comes from the types of businesses he targets. Dividend stocks
are often highly profitable and mature companies with proven business models. This overlaps
heavily with Buffett’s investment preferences. As I mentioned at the beginning of the video,
Warren Buffett’s Berkshire Hathaway earns around $4 billion in annual dividends. This
number doesn’t even include returns from companies where they have full ownership, like See’s Candy.
One of Buffett’s best performing dividend stocks is The Coca Cola Company, which he’s owned since
1988. This year, that investment will pay him more than $656 million in dividend income.
With an initial cost basis of $3.245 per share, Buffett now boasts a 50.5% dividend yield on cost.
This means that he is more than doubling his initial investment every 2 years,
through dividends alone. Coca Cola has been consistently growing their dividend for over
58 years, and there seems to be no indication this trend will stop any time soon. This is a classic
example of investing in a company with strong competitive advantages and holding long term.
If you want to learn more about Coca Cola, I did a full stock review on the company and will provide
a link in the description of this video. In 2016, Warren Buffett invested heavily into
Apple and Berkshire Hathaway now owns over 5.9% of the company. He’s already seen a significant
return on his investment, but I think it’s poised to be his next Coca Cola. This year he’s set to
earn $822 million in dividends, which is the most of all his holdings. I don’t know his exact cost
basis, but given the time he invested I assume his yield on cost is currently around 2-2.5%.
Apple is currently the most valuable brand in the world and has massive customer loyalty.
Additionally, it has 9 years of dividend growth and a 10.5% 5 year compound annual growth rate.
I would not be surprised at all, if in 30 years Buffett would be doubling his initial investment
every 2 years through dividends, similar to Coca Cola. If you want to learn more about Apple,
I also did a stock review on that company and will provide a link in the description as well.
Buffett has many other dividend stocks with a huge yield on cost. This is accomplished
through the long-term nature of his investments. Moody's, the credit rating, risk assessment,
and data analytics company, is another cash cow for Berkshire Hathaway. This year it will
pay over $55 million in dividend income. With an initial cost basis of only $10.05 a share,
Berkshire's annual yield on cost is 22.3%. Buffett doubles his initial investment through dividends
every 4.5 years. Considering the current price of Moody’s is around $270 with a 0.8% dividend yield,
his investment is a prime example of how long-term investing can net massive yield on cost.
American Express pays Buffett $260 million in annual dividend income. At an initial cost basis
of $8.49 per share, Berkshire Hathaway has a 20.3% dividend yield on cost. This means that
in just under 5 years they will double their initial investment through dividends alone.
Other notable investments such as, Bank of America pay $743.7 million in annual dividends,
Wells Fargo pays $659.3 million, Kraft Heinz pays $521 million, US Bancorp pays $222.5 million,
and JP Morgan Chase pays $214.2 million. These are just some of the many dividend stocks in Warren
Buffett's portfolio. The main takeaway here is that when you invest in companies with sustainable
competitive advantages over a long time horizon you can recieve huge yields on cost and massive
returns. Bonus-
I hope this video provided some interesting ideas to think about and let me know in the comments if
you like this topic. I’ll be sure to work on more stock review videos soon, as well.
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