With £2,000 in excess savings, I’d buy 41 shares in this Warren Buffett dividend stock

With £2,000 in excess savings, I’d buy 41 shares in this Warren Buffett dividend stock

Coca-Cola (NYSE:KO) is arguably one of the best dividend shares in the world. The company has been consistently increasing its distributions to shareholders for over 50 years.

It’s not just me that thinks this. The stock is a huge part of Warren Buffett’s portfolio at Berkshire Hathaway.

What makes the company great?

There’s a lot about Coca-Cola that makes it better than the average business. But there are some important points that often go below the radars of a lot of investors.

Unlike companies like Pepsico and Unilever, Coca-Cola outsources its bottling and distribution operations. This has a number of advantages.

Most notably, this helps keep costs down. Without the expenses of manufacturing, Warren Buffett’s favourite drinks company has managed to maintain higher margins than its rivals.

Coca-Cola vs. Pepsico vs. Unilever operating margins

Created at TradingView

There’s another benefit, too. Outsourcing distribution to local franchises means Coca-Cola can benefit from local knowledge and expertise along with a global scale.

Dividends

At 3.15%, it’s fair to say Coca-Cola shares don’t come with the most eye-catching dividend yield at the moment. Again, though, I think it’s worth a closer look.

Over the last 20 years, investors have only been able to buy the stock with a higher dividend yield a couple of times. Those were during the 2009 crash and just before the Covid-19 pandemic.

Coca-Cola dividend yield 2004-24

Created at TradingView

It’s no secret that Coca-Cola is a quality business and that makes buying shares in it at a discount a rare opportunity. In a broader historical context, a 3.15% return is unusually high.

A high dividend yield, though, can be a sign that investors are pessimistic about a company’s future prospects. And I think this might be the case right now.

Risks

Arguably the biggest post-Covid development in the healthcare sector has been the emergence of weight loss drugs. Both Eli Lilly and Novo Nordisk have been making big progress in this area.

There’s a concern this might weigh on demand for Coca-Cola’s products. And if that’s true, then the company’s growth prospects might not justify its current price-to-earnings (P/E) ratio of 25.

This is a real risk for the company. But I think the stock looks attractive at today’s prices because investors are expecting the worst and this may or may not materialise.

The trend towards healthier consumption has been around for a while and Coca-Cola continues to go from strength to strength. So I see the market’s reaction as overly pessimistic.

Passive income

As I see it, now looks like a good time to use £2,000 to add 41 shares in Coca-Cola to my investment portfolio. I think it could be a great source of passive income over the long term.

Investor wariness at the rise of GLP-1 drugs has caused the share price to fall and the dividend yield to rise. As a result, there’s an unusual opportunity to buy one of Warren Buffett’s favourite stocks.

At today’s prices, there are other stocks with bigger yields. But I don’t think they’re as strong as Coca-Cola, which is why I’m looking at buying the shares at today’s prices.

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Stephen Wright has positions in Berkshire Hathaway and Unilever Plc. The Motley Fool UK has recommended Novo Nordisk and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.