Revealed: Warren Buffett’s Secret Dividend Strategy

If it were anyone but Warren Buffett, investors would respond with a dismissive hand-wave.

Because it is Warren Buffett, we pay attention. In this instance, rightly so.

The investment strategy Buffett regularly employs that others frequently dismiss is the secret to his success is stunningly simple. The strategy is buy-and-hold.

It’s buy-and-hold with a simple twist. It’s buy-and-hold with a dividend-growth stock.

The top 10 holdings in Berkshire Hathaway’s (NYSE: BRK.b) stock portfolio account for 80% of portfolio value. All are dividend-growth stocks, reflecting the Buffett dividend strategy.

The top three holdings – Apple (NASDAQ: AAPL), Wells Fargo (NYSE: WFC), and Kraft Heinz (NASDAQ: KHC) – account for 43% of Berkshire’s portfolio value.

These three investments alone generate $2.01 billion of dividends annually for Berkshire. Because the dividend grows annually, the aggregate amount grows annually.

Apple and Kraft Heinz are new additions to the Berkshire portfolio. Wells Fargo has been a top holding since 2001.

You can understand Buffett’s affinity for buying and holding a dividend-growth stock when you vet Berkshire’s fifth-largest holding — Coca-Cola (NYSE: KO).

Buffett began accumulating Coca-Cola shares for Berkshire in 1987. He bought $1 billion worth of Coca-Cola stock in 1988. We’ll assume Buffett paid an average of $2.50 per share (split-adjusted) for his Coca-Cola shares. This is reasonable given the trading range in late 1987 and 1988.

Berkshire owns 400,000 Cola-Cola shares. It has owned the shares for 30 years.

Coca-Cola paid an $0.08-per-share annual dividend (split-adjusted) in 1988. It pays $1.56-per-share in annual dividends today. Buffett’s $1 billion Coca-Cola investment pays $624 million annually in dividends. Because Coca-Cola is a dividend grower, the dividends Berkshire receives annually from Coca-Cola will increase.

Berkshire Hathaway will receive annual Coca-Cola dividends within the next 10 years that cover its initial $1 billion investment. That’s a 100% annual return on investment.

As the dividend goes, so goes the share price. Buffett’s billion-dollar Coca-Cola investment in 1988 is worth $18.4 billion today.

If you’re less patient than Buffett, no need to fret. You can see your wealth expand in only a few years.

High Yield Wealth recommendation Altria Group (NYSE: MO) is a ready example of the Buffett dividend strategy.

Altria Group is the company behind Marlboro cigarettes. Altria Group has grown its dividend annually for the past 48 years. We’ve benefited from the past seven years of Altria Group’s dividend growth.

We first recommended Altria Group’s shares in September 2011. Altria Group paid per-share dividends of $1.52 at the time. Altria Group shares were priced at $27.26 when we offered our initial recommendation. Altria Group’s dividend offered a 5.6% yield on our cost basis.

Thanks to relentless annual dividend growth, Altria Group pays $2.80 per share in annual dividends today. The dividend today yields 10.3% on our $27.26 cost basis.

And as the dividend goes, so goes the share price. Altria Group shares are priced near $60.75 as I write. The price has doubled and then some over the past seven years.

Berkshire’s top-10 stock holdings will pay it $3.9 billion in annual dividends. That figure is assured to grow 5% to 10% annually. The market value of the underlying stocks paying those dividends is assured to grow too.

Because of the pedestrian nature of Buffett’s investing secret, many investors will still respond with a dismissive hand-wave, even if it is Buffett. As for me, I respond to the Buffett dividend strategy with an appreciative nod and a welcoming embrace.

I also respond with action. My personal investment portfolio is larded with proven dividend-growth stocks.

— Steve Mauzy

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Source: Wyatt Investment Research