I think there’s an unusual opportunity right now for investors looking to earn passive income. One of Warren Buffett’s most durable investments looks like it’s trading at a surprisingly attractive price.
The stock in question is Coca-Cola (NYSE:KO) which is roughly at the same level it was at four years ago. But a growing dividend indicates to me that the stock is better value now than it was in 2020.
Stagnation?
With a 46% share of the US soft drinks market, I accept that scope for further gains here are limited. And the emergence of GLP-1 weight loss drugs means this market might not grow much in future.
This might make it hard to see where future growth is going to come from. But I think there are two clear avenues for the company going forward.
One is expanding into new categories. Going back as far as 1960, Coca-Cola has a history of acquiring businesses in other areas including Minute Maid in juices, Costa in coffee, and Glaceau in bottled water.
Another is through growing its business in different markets. As global GDP increases – and in emerging markets especially – I think there’s still significant scope for growth.
Competitive advantages
Coca-Cola will have to compete hard to grow in these ways. But even beyond its 26 billion-dollar brands, I think the firm has some important advantages over its rivals.
The first advantage is its scale. In terms of beverages, Coke’s marketing spend is around four times that of its nearest rival PepsiCo, giving the company’s products a big boost.
Another is the company’s bottling network. By outsourcing operations to local franchises – including Coca-Cola HBC – the company benefits from local expertise to go with its global scale.
It’s no accident that Coke has been so successful to date. Together, I think these two strengths give the company a formidable advantage when it comes to competing in new categories and geographies.
Monthly passive income
As a UK investor, I have to pay a withholding tax on dividends from US businesses. So rather than the advertised 3% dividend yield, I’d actually get 2.6% if I bought the stock today.
That means a £10,000 investment would return £260 in dividends during the first year. But I’m expecting Coca-Cola’s dividend to keep growing as it has done over the last 50 years.
If the company’s dividend increases by 7% a year, the return should reach £511 in year 10. After that, it’s £717 in year 15 and £1,411 – or £117 per month – after 25 years.
That assumes I decide not to reinvest my dividends to boost my passive income. If I did that, things would move along faster, depending on what price I can buy shares at in future.
Buffett’s sucess
Buffett has had great success with Coca-Cola shares – a stock that returned $75m a year in 1994 and distributed $704m in dividends last year. And that’s without any reinvestment.
At today’s prices and exchange rates, £10,000 would get me 213 Coca-Cola shares. I think that would be a great way to start earning passive income that I expect to prove durable over time.
