Warren Buffett’s investment strategy has proven successful for decades. He looks for companies with strong, growing dividends. In his recent letter to Berkshire Hathaway investors, Buffett shared his “secret sauce” for success.
He highlighted two stocks as examples: Coca-Cola and American Express. Buffett bought his last share of Coca-Cola stock in 1994. That year, he received $75 million in dividends from his position.
By 2022, the annual dividends had increased to $704 million. KO has grown its dividend twice in the two years since. Berkshire Hathaway completed its purchase of American Express stock in 1995.
They invested the same amount as in Coca-Cola: $1.3 billion. In 1995, AXP paid Berkshire $41 million in dividends. The dividend stream grew to $302 million a year in 2022.
Last spring, AXP announced a 17% dividend increase.
Buffett’s dividend growth strategy
Berkshire’s annual income stream from those shares is now well over $350 million per year.
To assess if these stocks can keep growing dividends, two metrics are crucial. The payout ratio is the percentage of net income a company devotes to paying dividends. Earnings growth is also important.
A higher payout ratio can make dividend growth tenuous. A lower payout ratio indicates room for growth. Coca-Cola’s payout ratio of 77% is on the high side.
Its earnings growth fell last quarter. Future dividend hikes are likely to be modest in the near term. In contrast, American Express’ earnings growth was 38% last quarter.
Its low payout ratio of 19% indicates the company could have years of strong dividend growth ahead. Buffett’s investment philosophy of choosing companies with strong, growing dividends has proven reliable for long-term gains. This “secret sauce” has propelled Berkshire Hathaway to unparalleled success.
While Coca-Cola and American Express have shown significant dividend growth in the past, their future potential requires careful analysis of payout ratios and earnings growth.
