Buy the World's Best Dividend-Payers While They're Still on Sale

Mr. Pat created multiple generations of millionaires with a single idea... really, just a single observation.

Mark Welch "Mr. Pat" Munroe noticed that even during the depths of the Great Depression, folks would still spare a few cents to buy a cold Coca-Cola.

His daughter explained that "Daddy liked the taste... and he figured folks would always have a nickel for a Coke."

Mr. Pat ran Quincy State Bank in his hometown of Quincy, Florida. He wasn't a professional stock investor. But he reviewed the profits and return on capital at Coca-Cola (KO) and determined it was a stellar business.

At the time, Coca-Cola shares had fallen to $19 – after going public at $40 in 1919 – due to tumult in the sugar industry.

Mr. Pat snatched up shares... And he told everyone in Quincy to do the same.

What happened next is the story of how to get rich – and a lesson that the world's greatest investors are putting to work right now, for a reason...

As folks tell it, farmers would come into Quincy State Bank for a $2,000 loan, and he'd offer them $4,000 on the condition they put half in Coca-Cola shares. (As conservative investors, we think that may have been a step too far.)

He also steeled the nerves of the townspeople and convinced them to keep holding through all sorts of worrisome market fluctuations.

The result: Quincy, Florida became one of the richest towns per capita in the U.S. It boasted 67 "Coca-Cola millionaires" back in the 1940s, when the town only had about 4,000 people and a million dollars was an incredible amount of money.

When he died in 1940, Munroe was able to leave $1 million for each of his 18 children.

And you can see how it happened. A single share of Coca-Cola that traded for $19 in the 1930s, with dividends reinvested, would now be worth more than $10 million.

Yes, we'd prefer a little more diversification. But when you hear of investors who built quiet, generational wealth, this is how it happens... by holding quality, dividend-paying investments over a long time.

The story of Quincy's individual, nonprofessional investors dovetails with that of the greatest investor of all time...

Warren Buffett has also owned shares of Coca-Cola for decades, as he reminded us in a recent shareholder letter.

Now, this year's annual letter to his Berkshire Hathaway (BRK-B) shareholders was one of the shortest he has ever written. You may think that's because it was a bad year for stocks... and when investments run bad, Buffett may not have as much to crow about. But his Berkshire Hathaway shares actually returned 4% in 2022, compared with a loss of 18.1% for the S&P 500 Index.

So, maybe it's no surprise that Buffett went back to some of his time-honored lessons like buying businesses instead of stocks and thinking for the long term. There's just not much more to successful investing than this...

In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow.

American Express is much the same story. Berkshire's purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.

These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire's net worth, akin to its weighting long ago.

The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.

This is a key concept for income investors: yield on cost.

If you buy shares of a stock that pays $1 per year at $20, you collect a 5% yield. If that dividend per share rises to $2, then you are earning a 10% yield on your cost of shares.

Time + Growing Dividends = Extra-High Yields. It's that simple.

In Berkshire's case, its $1.3 billion investment now pays $704 million per year. That's a 54% yield on cost. In less than two years, Berkshire makes back its entire original investment.

But that's not all... Typically, the shares you bought don't currently pay a 10% yield to new investors. Instead, it's more likely that the shares have risen to keep the yield consistent.

In our example, those $20 shares may have risen to $40 to keep the yield at 5%. In Berkshire's case, the $1.3 billion invested in Coca-Cola rose to $25 billion.

This is the power of rising dividends. Higher dividends lead to higher yields and to higher share prices as well. And that's why you want to buy dividend-payers for the long term.

You should always be doing this. But from time to time, you should really be doing this.

At times, the market gives you a particularly ripe opportunity to buy stellar businesses with great dividends at good prices. We're in one of those periods today.

So, don't let it pass you by. After all the stock market analyses, forecasts, predictions, hunches, and guesses... this is about as close as you can get to an unassailable investment truth: Buy growing dividends, and you get rich.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: The devastating takeover of inflation and high interest rates has led to an unintended side effect. You see, these forces are quietly generating the best yields we've seen in years – in quality, low-risk stocks – while most folks are still on the sidelines. And it means right now is the ideal time to use Doc's No. 1 investing secret... a simple income strategy that he uses with the majority of his own money. Get the full details here.

Further Reading

"Most new investors learn the basics of how stocks work," Doc says. "For income investing, that's not enough." Dividend-paying stocks are only the beginning. But learning to invest for safe income doesn't have to be hard... Learn more here.

"Over broad history, rates tend to go down," Doc writes. That has been true over hundreds of years. But today, the short-term spike in interest rates is bucking the long-term trend. And that's giving income investors a rare opportunity... Read more here.