The Secret Buffett Won’t Tell You

Most traders are consumed by day-to-day share price fluctuations of their stock portfolios but few spend the time to think about the economics of compounding wealth, and how it can be done to achieve enormous gains.

One secret that Buffett unlocked in growing massive wealth was realizing what would happen to the dividend of Coca Cola over time. Back in the 1980s, he computed that, with its pricing power and wide economic moat, Coke would be able to increase dividends long into the future.

Fast forward a few decades and today’s dividends are paying him approximately 50% of his originally invested principal. That’s simply a function of holding onto his position and the Board of Directors continually increasing dividend payouts.

That’s all well and good you think but what if you missed out, how do you find the next opportunity?

Key Points

• Buffett’s investment in Coca-Cola shows the power of holding dividend-growing stocks, now earning him 50% of his original investment annually.
• Significant returns come from investing in stable, dividend-paying companies and holding them long-term, as shown by PoolCorp’s performance.
• Look for companies with wide moats and a history of increasing dividends, like Johnson & Johnson and Procter & Gamble, for long-term growth.

Finding The Next Coke

The Coke story is by no means the only example of such an opportunity. Take PoolCorp, for example. Back in 2014, it cost about $60 per share. By 2021, the share price had risen almost 10x to near $600 per share. Even at today’s prices of $328, PoolCorp has generated an enormous return for long-term shareholders.

But those shareholders haven’t only benefited from the gains in price, the payout has steadily increased too. The payout today is $4.80 per share, which translates to a yield of about 7.7% on 2014’s purchase price, even though today the yield current shareholders receive is just 1.46%. Or in other words, long-term shareholders enjoyed price gain of close to 5x and a dividend yield of about the same amount higher than today’s purchasers.

The key to the returns isn’t so much in finding a hidden gem so much as it is in sticking with a steady eddy stock that already pays a dividend and has a history and the potential of increasing it over time.

So what stocks fit the bill?

Are These Stocks Going to Pay A Fortune?

In order to find the next Coke, we’ll need to identify a list of stocks that have the characteristics Coca Cola did when Buffett first bought it for Berkshire Hathaway, meaning the businesses have a wide moat, pay a dividend already, have a history of steadily increasing the dividend, and are likely to continue increasing dividend payouts for the foreseeable future.

Here are 9 stocks that may be prime candidates:

Johnson & Johnson (JNJ)

• Economic Moat: J&J has a strong competitive advantage due to its diversified healthcare portfolio, including pharmaceuticals, medical devices, and consumer health products.
• Dividend History: Over 60 years of consecutive dividend increases.
• Revenue Stability: Healthcare products tend to be recession-resistant, ensuring steady revenue growth.

Procter & Gamble (PG)

• Economic Moat: P&G benefits from strong brand recognition and a wide range of essential consumer goods.
• Dividend History: Over 60 years of increasing dividends.
• Revenue Stability: Consumer staples are always in demand, regardless of economic conditions.

PepsiCo (PEP)

• Economic Moat: PepsiCo has a broad product portfolio including beverages and snacks, with strong brand loyalty.
• Dividend History: Over 50 years of consecutive dividend increases.
• Revenue Stability: Diversified revenue streams from both beverages and snacks ensure stability and growth.

McDonald’s (MCD)

• Economic Moat: McDonald’s benefits from its strong brand, global presence, and economies of scale.
• Dividend History: Over 40 years of increasing dividends.
• Revenue Stability: Fast food demand remains robust even during economic downturns.

Colgate-Palmolive (CL)

• Economic Moat: Strong brand recognition and a wide range of consumer products.
• Dividend History: Over 50 years of consecutive dividend increases.
• Revenue Stability: Consumer staples like toothpaste and cleaning products are always in demand.

3M (MMM)

• Economic Moat: Diversified industrial conglomerate with a strong portfolio of products and innovation capabilities.
• Dividend History: Over 60 years of consecutive dividend increases.
• Revenue Stability: Diversified business segments provide revenue stability.

Chevron (CVX)

• Economic Moat: Integrated energy company with strong global operations.
• Dividend History: Over 30 years of increasing dividends.
• Revenue Stability: Essential energy provider with significant global presence.

AbbVie (ABBV)

• Economic Moat: Strong pharmaceutical portfolio, particularly in immunology and oncology.
• Dividend History: Continuous dividend increases since its spin-off from Abbott Laboratories in 2013.
• Revenue Stability: High demand for healthcare products ensures stable revenue.

Realty Income (O)

• Economic Moat: Known as “The Monthly Dividend Company,” Realty Income has a diversified portfolio of commercial properties.
• Dividend History: Over 25 years of monthly dividend increases.
• Revenue Stability: Long-term lease agreements provide consistent cash flow.