If you are wondering how to invest like Warren Buffett, the investment Oracle with a net worth of over $ 80 billion and who has created over $ 400 billion worth for shareholders, then buy dividend stocks like Coca Cola, American Express or Moodys: the reason is as obvious as it is real.
Warren Buffett has always been very good at identifying the shares of companies with clear and sustainable competitive advantages, hold them in their investment portfolio for a long time. He is also a big fan of value stocks, i.e. stocks whose price / earning ratio is not very high. But there’s one factor in Buffett’s success that hardly gets the attention it deserves: dividend stocks. The vast majority of dividend-paying companies are profitable on a recurring basis and have time-tested business models. Buying stocks with dividends is a long-term investment, but it pays off a lot.
Why investing in dividend stocks is worthwhile
In 2013, Bank of America / Merrill Lynch released a report comparing the average annual return on stocks that initiated and increased their payments between 1972 and 2012 with the average annual return on non-dividend-paying stocks. The result was striking: dividend stocks recorded an average annual increase of 9.5%, while those that do not pay dividends recorded an average increase of 1.6% per year over this four-decade period.
Dividend stocks have historically outperformed those of “peer” companies that do not pay dividends.
The advantages of dividend stocks are therefore obvious: seen over the long term, the initial cost base can be quite low and if companies continue to increase their dividend payments, the time it takes to double the capital invested is reduced.
Here are three dividend stocks with which Warren Buffett doubled his invested capital over a period of two to five years. Obviously now the price of each share has increased compared to when Buffett bought it and therefore it would now take longer for the capital to double, but what matters is understanding the investment system.
Dividend stocks: Coca Cola
Beverage giant Coca-Cola has been a staple in Buffett’s investment portfolio since 1988, when the initial cost base was $ 3,245 per share. Coca-Cola pays $ 1.64 per share in dividends, so Buffett’s return on original cost is a delicious 50.5%. In other words, he is doubling his initial investment every two years thanks to dividends alone. Coca-Cola has also increased its base dividend for 58 consecutive years.
Dividend stocks: American Express
American Express has been a staple in Berkshire Hathaway’s portfolio since 1993, with an initial cost base of just $ 8.49 per share. American Express pays $ 1.72 in dividends per share, so Berkshire’s return on initial cost is an excellent 20.30%: it takes just five years, with no reinvestment, for Buffett to double his money from American Express dividend payments.
Dividend stocks: Moody’s
Despite only paying a 0.76% return in September, Moody’s is a money machine for Warren Buffett’. This is because Berkshire Hathaway’s initial cost base is only $ 10.05 per share (Moody’s shares are now priced at around $ 280). The company pays $ 2.24 in dividends per share annually, so the annual return on investment, based on the original cost, is 22.3%. This means that the invested capital doubles every 4 and a half years without reinvesting.