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Charlie Munger revealed an incredible investment secret while being interviewed last week.
Munger is Warren Buffett’s business partner at Berkshire Hathaway (NYSE: BRK.b). During the interview, he hinted at why he and Warren Buffett are attracted to a specific type of stock.
A few names in Berkshire’s investment portfolio were mentioned: Apple (NASDAQ: AAPL), American Express (NYSE: AXP), and Wells Fargo (NYSE: WFC).
Munger, though, was keen to focus on Coca-Cola (NYSE: KO). The soda king is one of Berkshire’s largest holdings. It’s also one of the longest tenured. Berkshire has owned the stock since 1987.
He gushed about Coca-Cola products, their staying power, their impossibility to replicate during the interview.
Of course, Munger highlighted Coca-Cola’s growing dividend payments through the years.
Unfortunately, he missed the most important part . . .
If you vet Berkshire’s history with Coca-Cola, you soon understand why the dividend is a big deal. You could even say it’s the key to Berkshire’s storied success.
Charlie Munger and Warren Buffett began buying Coca-Cola shares for Berkshire in 1987. Within a few months, they had purchased $1 billion worth of stock at roughly $2.50 per share (split adjusted).
As for the dividend, it has only grown over the years. Coca-Cola pays a $1.60-per-share dividend today.
If we relate the dividend today to Berkshire’s $2.50 cost basis for 1987, an extraordinary number appears.
Berkshire realizes a 64% return on its original investment – EVERY SINGLE YEAR!
And that’s assuming that the stock price doesn’t rise by a single penny.
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Coca-Cola’s dividend-growth trend will surely continue. And so will Berkshire’s annual return.
If we assume that Coca-Cola increases the dividend 6% annually, the annual dividend should reach $2.50 per share by 2027. That’s a pretty safe assumption about the average annual increase.
Now, an even more impressive number emerges.
A $2.50 annual dividend on a $2.50 investment creates a 100% annual return – one realized on dividends alone.
There’s more to the story, though. I have yet to consider share-price appreciation.
When dividends go up, share prices tend to go up.
Coca-Cola’s share price has risen over the years with the dividend. Berkshire’s $1 billion investment is worth roughly $19 billion today – 19 times what Berkshire paid.
Buffett’s and Munger’s experience with Coca-Cola has guided their investment philosophy over the years. It’s no coincidence that Apple, Wells Fargo, and American Express are also proven dividend growers.
Nine of the top 10 stocks in Berkshire’s investment portfolio are dividend-growth stocks. Given enough time, many of these stocks will produce 100% annual returns with their dividends.
The good news is that anyone can use this secret from Charlie Munger and Warren Buffett to generate 100% annual returns of their own.
Frankly, I’ve been using this secret for years with dividend-growth stocks including Altria Group (NYSE: MO), VF Corp. (NYSE: VFC), and Qualcomm (NASDAQ: QCOM).
It’s a long-term strategy – and it works great.
Folks looking for bigger income payments have to check out this new 316(R) Retirement Royalty Program.
The results have been absolutely amazing.
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Good Fortunes,
Stephen Mauzy
Downingtown, Penn.