When we own shares of exceptional companies with exceptional managers, our preferred holding period is forever. — Warren Buffett, 1988 Letter to Berkshire Hathaway shareholders
The blue-chip-heavy Dow Jones Industrial Average recently moved into bearish territory, meaning the index has fallen at least 20% from its previous high.
No matter how many times you’ve seen the markets fall and then rise, it’s still unsettling to see your savings suddenly drop by 20%. It always feels like your stocks might not come back, but that’s where following Warren Buffett’s timeless investment advice can help put the odds in your favor.
When it comes to managing Berkshire HathawayBuffett’s stock portfolio, typically invests in large, profitable companies, and he always buys them at reasonable valuations. The following are the top two stocks in Berkshire’s portfolio, both Dow Jones stocks, which investors can expect to deliver strong long-term returns, while earning dividend income along the way.
Apple’s installed base of devices continues to grow
Apple is looking more and more like an “eternal” investment for Buffett. It originally sank $36 billion in Apple (AAPL -0.29%) stock between 2016 and 2018, and it’s still Berkshire’s largest holding, worth $122 billion at the end of the second quarter.
Apple wields enormous influence over the consumer. The iPhone consistently achieves high customer satisfaction scores, and the large profit margin and free cash flow that Apple generates each year allows for continuous improvements and investment in new products and services. Apple said it attracted a record number of Switches from other brands in the last quarter, which speaks volumes about the power of its brand.
While the latest reports suggest initial iPhone 14 sales may be weaker than expected, that shouldn’t scare you away from buying the stock right now.
What really creates value for Apple shareholders is the growing installed base of devices. Apple announced a record for its installed base last quarter, something that has happened regularly in recent years. This paves the way for further growth in app and subscription sales through the App Store, which generates a third of the company’s gross profit.
Apple is also a major buyback of its shares, which Buffett likes to see when buying stocks. It has reduced its outstanding shares by 21% over the past five years. Share buybacks proportionally increase the percentage of shareholder ownership in the overall business, which is equivalent to receiving an indirect dividend that continues to increase in value as the underlying business grows.
Apple is also paying a growing stream of dividends to shareholders, with a current yield of 0.61%. Make no mistake, Apple is a top tech stock to buy and hold for the long term. It’s not a bargain, but a price/earnings ratio (P/E) of 24 is a fair valuation for one of the strongest brands in the world.
Coca-Cola has the power to set prices to counter high inflation
Buffett originally bought shares of Coca Cola (KO 0.46%) after the stock market crash of 1987. Berkshire has been a major shareholder in the company ever since, currently holding 400 million shares, worth $25 billion at the end of the second quarter.
Coca-Cola has tremendous brand power, and it’s a great stock to consider no matter what happens to the economy. Consider its recent performance in the second quarter. Adjusted revenue increased 16% year over year, with adjusted profit of 4%. Coke’s ability to raise the prices of its products to stay ahead of inflation is one of the main reasons the stock has outperformed the market year to date – it is not down just 5.3% at the time of writing.
Coke products are affordable and can be purchased in large quantities with every visit to the grocery store. Due to these characteristics, small increases in unit selling prices have no impact on sales volumes. This allows Coke to maintain a high profit margin to fund growing dividend payments and share buybacks.
Coca-Cola has repurchased about a third of its shares over the past 30 years. It also distributes about three-quarters of its annual earnings per share as dividends each year. The current yield is 3.11%, almost double the S&P500average yield of 1.70%. In other words, investors can earn around $150 per year in income on a $5,000 investment.
Strong brands, pricing power and cash returns for shareholders are three good reasons to buy the stock. While the stock trades at a forward P/E of 23, Coke’s above-average dividend yield makes it a great stock to hold until retirement.
John Ballard has no position in the stocks mentioned. The Motley Fool holds and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $47.50 long calls in January 2024 on Coca-Cola, $120 long calls in March 2023 on Apple, short calls of $200 in January 2023 on Berkshire Hathaway (B shares), short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.