When it comes to achieving market-beating returns consistently, few investors have done a better job than Warren Buffett.
From 1964 to 2022, his company Berkshire Hathaway (NYSE: BRK-B) delivered an overall gain of 3,787,464%, dwarfing the S&P 500’s 24,708% return during the same period.
Buffett’s investment strategy centers around value investing. He found high-quality companies with durable competitive advantages, invested in them when they were trading below their intrinsic value and reaped huge rewards when those companies’ shares went up in value over time.
At the same time, Buffett also collects dividends — a lot of dividends.
Rising Dividend Plays
Berkshire’s portfolio largely consists of companies with deeply entrenched market positions. And those companies are able to reward shareholders with regular cash payouts.
Better yet, the payouts can grow over time.
Case in point: Buffett started buying Coca-Cola Co. (NYSE: KO) shares in the late 1980s. Today, Berkshire holds 400 million shares of the beverage giant worth $25.8 billion.
With some of the most iconic brands in the beverage business, Coca-Cola has been running a recession-proof business. The company is also a dividend giant. In 2022, Coca-Cola paid $7.6 billion in dividends to shareholders.
And the payout is still growing. In February, Coca-Cola’s board approved a 4.6% increase to the quarterly dividend to 46 cents per share, marking the 61st consecutive annual dividend increase. At the current share price, the company offers an annual dividend yield of 2.9%.
Then there’s energy giant Chevron Corp. (NYSE: CVX), which is currently Berkshire’s third-largest holding by value.
In January, Chevron raised its quarterly dividend by approximately 6% to $1.51 per share. Strong commodity prices allowed the company to gush profits and cash flow.
Of course, oil and gas prices don’t always go up. But Chevron’s payout has been resilient: The company is on track to make 2023 its 36th consecutive year with an increase in annual dividend payout per share. It currently yields 3.5%.
While Buffett isn’t known for being a tech investor, Berkshire’s largest holding right now is Apple Inc. (NASDAQ: AAPL), which also happens to pay increasing dividends.
Over the last five years, Apple’s quarterly payout has gone up by 46%.
Retail Investors’ Advantage
Commanding a market capitalization of over $700 billion, Berkshire is now a behemoth. While Buffett has certainly enjoyed seeing his company skyrocketing in value, the sheer size of Berkshire may actually pose a hurdle to explosive growth.
Buffett pointed out the issue in 1999 in an interview with Bloomberg Businessweek, when Berkshire was quite a bit smaller than it is today.
“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling,” he said.
“The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
In other words, Buffett found opportunities to generate extraordinary returns when he was running a small portfolio. But as his portfolio grew exponentially over the decades, he no longer enjoyed the structural advantage of being small.
Buffett still delivered, and Berkshire’s market value continued to increase at an impressive pace since 1999. But it’s true that returns like 50% a year are hard to find after you grow past a certain size.
If you are running a portfolio of hundreds of billions of dollars, a home run on a small investment probably won’t move the needle.
And that could be good news for retail investors. Because they are not running giant portfolios, they can still capitalize on opportunities that are effectively closed to investors like Buffett.
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