2 of the Best Warren Buffett Stocks for a Lifetime of Passive Income
I'm LongbridgeAI, I can summarize articles.Warren Buffett stepped down as Berkshire Hathaway's chairman, becoming chairman emeritus. The article highlights two of his favorite stocks for passive income: Apple and Coca-Cola. Apple is praised for its strong brand, high free cash flow, and growing dividend despite a low yield. Coca-Cola is noted for its decades-long holding status, defensive consumer staples nature, and exceptional 64-year streak of dividend increases, making both companies exemplars of Buffett's long-term investing philosophy.
Warren Buffett stepped down as CEO of Berkshire Hathaway (BRKA +0.13%) (BRKB +0.23%) at the beginning of the year, but he kept his position as chairman of the board. Or at least he did, until recently, when he decided to also give up that role. He became chairman emeritus and remains on the company's board of directors. It's the end of an era at Berkshire. Still, Buffett's investing philosophy -- one which relies on letting time and compounding work their magic -- will likely continue to influence the conglomerate for a long time.
Retail investors can continue to learn a lot from Buffett, notably by revisiting some of his favorite stocks. Let's discuss two of them: Apple (AAPL +0.66%) and Coca-Cola (KO -0.27%). These market leaders are great examples of why Buffett's approach is so powerful. Let me explain.
Image source: The Motley Fool.
1. Apple
Buffett did not initiate Berkshire Hathaway's first investment in Apple. It was engineered by one of his investing lieutenants, Todd Combs or Ted Weschler (Combs has since left the company). However, Buffett has expressed his admiration for Apple on multiple occasions, even going so far as saying that it is “probably the best business I know in the world.”
Apple does, indeed, have many of the qualities Buffett looks for. First, the business is fairly simple to understand. The tech leader manufactures and sells electronic devices, with the iPhone being, by far, its most important product. Apple generates consistent and somewhat predictable annual revenue and profits. And even more importantly, as Buffett would argue, the company also generates significant free cash flow.
NASDAQ: AAPL
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Second, Apple has a strong competitive advantage that stems from multiple sources. Its brand name is incredibly powerful and essentially does much of the marketing work. People are willing to pay premium prices for Apple's devices and often renew their smartphones every few years, creating a recurring sales stream. Apple also benefits from high switching costs.
Third, Apple prioritizes returning capital to shareholders. The company boasts a solid share buyback program and a decent dividend track record compared to its similarly sized tech peers. Apple's forward yield of 0.3% isn't impressive, but the company has regularly increased its payouts, raising them by 89.5% over the past decade. Apple is unlikely to reduce or suspend its dividend anytime soon, as the company still has a robust underlying business and excellent long-term prospects.
The company's large installed base of active devices, now surpassing 2.5 billion, offers ample monetization opportunities within its services segment. And newer devices, such as the iPhone Duo, Apple's first foldable smartphone, could help further expand its installed base. Lastly, Apple has shown in recent years that it can overcome challenges such as tariffs. The bottom line: Apple's business is strong, and its dividend appears secure.
2. Coca-Cola
Coca-Cola is one of the stocks Berkshire Hathaway has held onto the longest. It has been in the conglomerate's public equity portfolio for over three decades. The beverage leader also has the profile of a typical Buffett stock, including a consistent, fairly predictable business. Coca-Cola has been one of the top players in the beverage market for a long time. Consumer tastes have changed, and the company has adapted by launching new products.
Coca-Cola's vast portfolio features products across practically every category, including soft drinks, coffee, tea, sports drinks, and water brands. There is something for everyone under the Coca-Cola umbrella. That's one of the company's strengths. Another one is the strength of its brand name. Not only is the Coca-Cola logo recognized practically everywhere on planet Earth and inspires consumer trust, but it also allows the company to command shelf space in grocery stores, something that's not easy for newcomers in the industry.
NYSE: KO
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Furthermore, Coca-Cola's business can perform relatively well even during economic downturns. The company is a consumer staples leader, a defensive industry that fares better than most others when the economy is down, since it offers (mostly) everyday essentials that people continue to buy even when the purse strings tighten. Then there is Coca-Cola's outstanding dividend track record. The company is a Dividend King, meaning it has increased its payouts for at least 50 consecutive years (64, to be exact).
This streak shouldn't end anytime soon: Coca-Cola has plenty of growth levers, including tapping into less-mature markets (particularly middle- or low-income countries where beverage consumption trails that of other regions) and launching new products to meet emerging demand, among other opportunities.
In short, Coca-Cola is a dividend stock that could pay you for life.