The Benefit Of Patience For Income Investors

Includes: BRK.B, KO
by: Tim McAleenan Jr.

I just came across a phenomenal passage written by Roland Head of He breaks down Berkshire Hathaway's (NYSE:BRK.B) legendary investment in Coca-Cola (NYSE:KO), demonstrating just how lucrative the combination of time and dividend growth can be. Head gives us these details about Coke's income performance over the past 24 years:

One of Buffett's most famous long-term holdings is his 8.9% stake in The Coca-Cola Company. The $15 billion shareholding is the largest holding of Buffett's company, Berkshire Hathaway, and most of it dates back to 1988, when Berkshire spent $1 billion to acquire a 6.2% stake at an approximate cost, adjusted for splits and dividends, of $3.75 per share.

Back in 1988, Coke shares offered a yield of 4% -- decent, but not remarkable. Since then, the company has maintained its 50-year unbroken record of annual dividend increases. The result is that in 2011, the dividend payout was $1.88, providing Buffett with a massive 50% yield on his original investment.

That kind of sums up the ideal of dividend growth investing, doesn't it? If we had to make our case for long-term dividend growth investing in court, Buffett's 24 year-old investment in Coke would certainly qualify as "Exhibit A."

Buffett addressed the combination of time and Coke's growing dividend in his 2010 Letter to Shareholders of Berkshire Hathaway:

Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

What I like about Buffett's investment success is that it does not rely on getting many decisions right: he identified Coca-Cola as an excellent company, he determined an appropriate price to pay for the stock, and then he simply sat and held. This is a success story that seems within the realm of possibility for us more mortal investors. It would not surprise me to hear from investors in Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), and Colgate-Palmolive (NYSE:CL) to be telling a similar story a quarter century from now.

A lot of times, we get this idea into our heads that investment success involves being the smartest guy or gal in the room. But that's not the case - the winner is often the one who is able to deploy capital day after day, year after year, without wavering. But it only works if we deploy capital into the right businesses. There is a reason why Buffett said that time is the friend of the wonderful business.

Once we can identify companies that pass the wonderful test, the key to success becomes patience, patience, patience.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.