Warren Buffett Is Set to Make $2 Billion in Dividend Income in 2024 From Just 3 Stocks | The Motley Fool (2024)

Warren Buffett has made fortunes for early investors in Berkshire Hathaway (BRK.A 1.06%) (BRK.B 1.20%) who held on to the stock for the long term. The stock returned 3,787,464% from 1965 through 2022. That's more than 150 times the 24,708% return from the S&P 500 index over the same period.

Contributing to those returns was the growing value of Berkshire's stock holdings -- a portfolio worth $318 billion at the end of 2023's third quarter. One common theme among its largest stock holdings is that those stocks own strong brands and pay regular dividends.

Buffett acknowledged in last year's shareholder letter that stakes in Coca-Cola (KO 0.35%) and American Express (AXP 7.10%), which Berkshire Hathaway has held for decades, have provided it with billions of dollars in unrealized gains from share price appreciation that was partially powered by their growing dividends.

These two stakes, along with its massive stake in Apple (AAPL -0.90%), are set to provide the conglomerate with nearly $2 billion in dividend income over the next year.

Coca-Cola: $736 million in dividend income

Coca-Cola is the longest-held position in Berkshire Hathaway's portfolio. In his 2023 shareholder letter, Buffett noted that in 1994, Berkshire completed its multiyear investment in the company -- spending a total of $1.3 billion on what are now (after a pair of 2-for-1 splits in the years that followed) the 400 million shares it still owns. It paid an average of $3.25 per split-adjusted share for that stake. That position is currently worth $24 billion and provides Berkshire Hathaway with annual dividend income of $736 million -- 56% of its original cost basis.

Coca-Cola has increased its payouts for 62 consecutive years, and Buffett expects the streak to continue. If co*ke raises its quarterly dividend payment by $0.02 per share in 2024 (a level consistent with its boosts in the last two years), Berkshire's dividend check will increase another $8 million to $744 million over the next year.

co*ke-branded products make up only a third of the company's annual unit case sales volume. The diversity of its brand portfolio, which includes juices, water, and teas, allows the company to market multiple beverages for different occasions and smooth out sales across geographies. Latin America has been one of the company's fastest-growing regions, posting double-digit percentage sales growth last quarter, which offset weaker results elsewhere.

Another important reason to expect Coca-Cola to remain a solid income investment is its ability to adapt to shifting consumer preferences. co*ke generated nearly a third of its sales volume in 2022 from no-sugar and low-calorie products. Its success with products like co*ke Zero fuels its ongoing solid results; non-GAAP (adjusted) revenue was up 11% year over year in the third quarter.

Making syrups from concentrate doesn't require a lot of capital. Coca-Cola has a globally recognizable brand and a profitable business model to keep sales, earnings, and dividends growing. Last year, it distributed 72% of its earnings via dividends. Its current yield is 3.05%.

American Express: $364 million in dividend income

Berkshire Hathaway has owned a stake in American Express for almost as long as it has held one in Coca-Cola. The cost basis on that investment was nearly $1.3 billion, or $8.49 per share.

Based on American Express' current quarterly payout of $0.60 per share, Berkshire will take in nearly $364 million in dividend income from the financial giant over the next year. At its current share price, Amex's yield is a below-average 1.32%, but it also has a low payout ratio of 21% and is growing profits at double-digit percentage rates that could support further increases in the payout.

American Express has similar advantages to those of Coca-Cola, such as strong brand power and a large customer base. At the end of 2022, it had over 76 million Amex cards in force worldwide and another 56 million cards issued by third-party brands.

Delta Air Lines is one third-party brand that is a valuable partner for American Express. Delta offers Amex card members travel-related perks, including airport lounge access and other services. It's these benefits, along with membership rewards and exclusive discounts at top retailers, that have built American Express into a desirable card for high-income shoppers.

A key advantage for American Express is that its average cardholder spends more on average than the users of other credit cards. The main advantage of this is that it gives American Express leverage with merchants in terms of setting its processing fees.

A high-spending membership base is also beneficial during occasional weakness in consumer spending broadly. The soft retail spending environment over the last few years hasn't hurt American Express, which reported record revenue in 2022 and continued to post solid results in 2023. Revenue net of interest expense grew 13% year over year in 2023's third quarter, while earnings jumped 34%.

The combination of a strong brand, customer loyalty, and a large network of merchant partners explains why Buffett has held this stock for so long and why he expects the dividend to keep growing.

Apple: $878 million in dividend income

Berkshire Hathaway first bought shares of Apple in 2016. After further share purchases and a 378% increase in Apple's stock price over the last five years, that stake is now worth about $167 billion. It is the largest investment Berkshire Hathaway has ever made in a single stock, and the annual dividend payout should also grow into a sizable amount over the long term.

Assuming Berkshire continues to hold 915 million shares of Apple, that stake will provide it with $878 million in dividend income over the next 12 months.

Apple has tremendous cash resources that it can invest in technology, but it's the company's brand that Buffett values the most. In terms of its products' technological features, Apple has often lagged its competitors. And yet, Apple remarkably still sells millions of iPhones, iPads, Macs, and Apple Watches every year. The iPhone is the biggest draw, bringing in $200 billion in annual revenue.

Apple's customers are drawn to the experience of the software behind these devices, where content is seamlessly tied together through its iCloud service. This is the heart of Apple's competitive advantage over Samsung and other smartphone rivals. While Apple controls less than 20% of the global smartphone market, it generates over 80% of the industry's profits.

A lucrative business model provides Apple with an enormous edge in finances. It held $57 billion of net cash as of the end of September, but management is working to bring that down to a neutral cash position through dividends and share repurchases. Making the task more challenging is that a massive amount of profits floods into the company's coffers every year. In other words, Apple has more cash than it knows what to do with.

Apple is now producing $99 billion in trailing free cash flow, which could fund a growing dividend and pave the way for new products and services that widen the company's economic moat. The upcoming Vision Pro mixed-reality headset might take a while to catch on with customers given its $3,499 price tag, but it shows Apple is not going to rely solely on its existing product lineup to drive long-term growth.

Like American Express, Apple also has a below-average yield, but what investors give up in yield, they make up for with dividend growth and share price appreciation. The company has more than doubled its payout over the last 10 years and boosted its share price by 873%. Given its low 15% payout ratio, Apple's dividend should grow for many years.