Warren Buffett has developed a reputation over the past several decades for being one of the greatest investors ever. Since he took over Berkshire Hathaway in 1965, his capital allocation skills helped drive that company's share prices up by 4,384,748% (as of the end of 2023).
Buffett made his reputation by executing a long-term investing style. He invests in companies that have durable competitive advantages and attractive return prospects because they, in part, trade at reasonable valuations. These qualities are also the ones you should look for when investing in stocks for passive income.
Here are two outstanding companies included in Berkshire Hathaway's $284 billion stock portfolio that should be able to keep growing their dividends for many years.
1. Coca-Cola
Coca-Cola (NYSE: KO) is a resilient brand that has paid growing dividends for more than half a century. It sees further opportunities to squeeze more revenue growth out of developed markets, which points to more dividend increases.
Coca-Cola manages to generate solid adjusted revenue growth despite weak sales volumes in North America. While unit case volume in North America declined by 1% year over year in Q2, volumes increased solidly in the Latin America and Asia Pacific regions, which speaks to the beverage company's opportunities to gain share in international markets.
The brand has been resilient during the inflationary environment. Most of the company's adjusted revenue increase of 15% year over year last quarter was attributable to its price hikes, which suggests healthy demand for its brands.
Of course, all of this helps fuel the company's earnings growth and dividend increases. Coca-Cola's adjusted earnings grew 17% year over year last quarter, and it paid out 58% of those earnings -- $0.485 per share -- in dividends. The company has increased its dividends annually for 62 consecutive years, and it is well-positioned to keep that streak going.
Overall, management characterizes the beverage industry as attractive and expanding, and Coca-Cola has the brand power to grow faster than the industry over time through market share gains. This is why Buffett has kept the stock in Berkshire's portfolio for more than 30 years without selling a single share.
Based on its current payout, the stock's forward dividend yield is 2.7% -- well above the S&P 500's average yield of 1.3%. With the company's sales and earnings growing at healthy rates, that high yield suggests Coca-Cola stock is probably undervalued and could continue to climb to new highs over the next year.
2. Visa
Buffett loves investing in businesses that dominate their markets and offer essential services that would be impossible to replace. That helps explain why Berkshire Hathaway owns shares of Visa (NYSE: V) and two other credit card companies.
The credit card market is dominated by a handful of brands, including Visa, American Express, Mastercard, and Discover, but Visa is a relatively safe credit card stock because unlike American Express and Discover, it doesn't issue the cards that include its name, so it doesn't carry any credit risk. It focuses on the far more lucrative business of managing the network that processes payments.
Over the last year, Visa earned $19 billion in profit on $34 billion of revenue, which gave it a high profit margin of 54%. These profits help fund reliably growing dividends for its shareholders.
Visa paid out 21% of its earnings over the last year. The current quarterly payout is $0.52 per share, bringing its forward yield to about 0.7%. This is a relatively low yield (in part because the stock is performing well), but investors are also getting above-average dividend growth.
Visa raised its dividend by 15% last year, and investors should expect the company's earnings to continue growing at double-digit percentage rates to fund more increases. Visa has a huge opportunity to capture even more of the $20 trillion worth of consumer payments that occur each year across cash, checks, and various forms of electronic payments.
Analysts expect the company's earnings to grow at an annualized rate of 12% over the next several years. Visa's stock price should continue to follow that growth and deliver satisfactory returns to shareholders.
Should you invest $1,000 in Coca-Cola right now?
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American Express is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends Discover Financial Services and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
2 Warren Buffett Dividend Stocks to Buy in September was originally published by The Motley Fool