Berkshire Hathaway (BRK.A 1.14%) (BRK.B 0.82%) CEO Warren Buffett has a knack for making himself and his shareholders rich. Since taking over as CEO in 1965, he has led Berkshire Hathaway’s (BRK.A) Class A shares to an aggregate return of 3,641,613% at the end of 2021. For those of you who keep the score at home, that equates to an average annual return of 20.1% over 57 years. This is nearly double the average annual total return, including dividends paid, of 10.5% for the S&P500 on the same section.
While there’s a long list of reasons for Buffett’s consistent outperformance, such as his love of cyclical stocks and his desire to own big companies for a long time, the unsung hero of the Oracle of Omaha investment portfolio could well be dividend income.
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Dividend stocks are almost always consistently profitable and proven. Plus, they have a rich history of outperforming companies that don’t pay long-term dividends.
Over the next 12 months, Warren Buffett’s more than two dozen dividend-paying stocks are expected to generate $6.07 billion in dividend income. About 71% ($4.28 billion) of that $6.07 billion will come from just five holdings.
Chevron: $928,862,606 in dividend income
Thanks to the second-quarter purchases of Berkshire Hathaway and New England Asset Management (aka Warren Buffett’s Secret Wallet), oil stocks Chevron (CLC 0.54%) is Warren Buffett’s top dividend-paying stock. Over the next year, it is expected to generate nearly $929 million in dividend income.
The Oracle of Omaha’s accumulation in energy stocks since the start of the year likely signifies its belief that oil and natural gas prices will remain well above average for the foreseeable future. Russia’s invasion of Ukraine has thrown a wrench into the global energy supply complex. When coupled with reduced investments in drilling, exploration and infrastructure by oil majors during the pandemic, you have a recipe for supply constraints that will not be quickly resolved.
Warren Buffett is probably also a big fan of Chevron’s integrated operating model. Although it derives its highest margins from drilling, Chevron also operates midstream and downstream assets. Midstream assets, such as transmission pipelines, typically operate on fixed price or volume-based contracts. It’s a fancy way of saying that no matter how volatile energy commodities are, midstream companies generate predictable cash flows.
Meanwhile, refineries and chemical plants downstream of the company benefit if input costs go down (i.e. if the price of crude oil goes down). In other words, Chevron is well covered.
Bank of America: $908,909,765
Berkshire Hathaway is also set to collect some serious changes from its more than a billion shares of Bank of America (BAC 3.22%). With BofA recently increasing its base annual payout to $0.88/share, Buffett’s company is expected to collect nearly $909 million in dividend income over the next 12 months.
Big banking stocks like Bank of America embody Buffett’s long-term vision. Even though banks are cyclical and therefore in trouble when recessions hit, the US economy spends a disproportionate amount of time expanding versus contracting. This allows a company like BofA to benefit from loan and deposit growth as the US economy expands over long periods of time.
What makes Bank of America particularly intriguing is its sensitivity to interest rates. No money center bank sees its net interest income fluctuate more with changes in interest rates more than BofA. As the Federal Reserve aggressively fights historically high inflation by raising interest rates, Bank of America stands to benefit from higher yields on its outstanding variable rate loans.
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Occidental Petroleum: $897,950,559 (including preferred stock dividends)
The third passive income powerhouse in Warren Buffett’s portfolio is oil stocks western oil (OXY -1.25%). Buffett’s company is expected to collect nearly $98 million in dividend income from the more than 188 million shares of Occidental it owns, as of Aug. 8, 2022, over the next 12 months. However, Berkshire Hathaway also makes an annual income of $800 million from the $10 billion of Occidental preferred stock it owns.
The upside catalyst for Occidental is, like Chevron, the prospect that oil and natural gas prices will remain high for years. Even though Occidental Petroleum is an integrated operator like Chevron, the company’s sales and margins are further skewed by its drilling operations. In short, Occidental is giving Warren Buffett supercharged exposure to oil drilling at a time when energy commodity prices are sky high.
But unlike the other dividend icons on this list, Occidental is an oddity given its heavily leveraged balance sheet. The Oracle of Omaha generally avoids businesses where debt could become an issue. In Occidental’s case, it needs sustainably high oil prices for the foreseeable future to pull itself out of significant net debt.
Apple: $842,008,404
It is perhaps unsurprising that tech stocks Apple (AAPL -0.96%) – Berkshire Hathaway’s largest holding by far – is one of Warren Buffett’s top dividend-paying stocks. Over the next 12 months, Berkshire is expected to reap just over $842 million in dividend income from Apple.
There’s a long list of reasons why Apple has made such a good investment for so long. It is one of the most recognized brands in the world, it has one of the most loyal followings of any publicly traded company and it is driven by innovation. The company’s iPhone, Mac and iPad have kept consumers coming back for more than a decade.
However, Apple’s future lies in its subscription services. While the company isn’t abandoning the physical products that made it what it is today, CEO Tim Cook oversees a steady transition to services, which drive higher margins, even better customer loyalty and should help minimize the mass of sales associated with the product. replacement cycle.
It’s also worth noting that Apple’s return on capital program is pretty much unmatched. Since the start of 2013, Apple has repurchased approximately $520 billion of its common stock.
Coca-Cola: $704,000,000
Warren Buffett’s fifth income giant is his oldest stock: the beverage giant Coca Cola (KO -0.30%). Berkshire Hathaway has held shares of Coca-Cola continuously since 1988. Based on Berkshire’s cost base of about $3.25 on Coke shares, Buffett’s company is earning a jaw-dropping 54% return over the cost.
In addition to having a well-known brand, Coke’s modest but steady growth is a reflection of its geographic diversity and marketing prowess. Regarding the first, Coca-Cola has ongoing operations in all but three countries of the world (Cuba, North Korea and Russia). Operating globally allows Coke to generate predictable cash flow in mature markets while benefiting from higher growth opportunities in emerging markets.
Coca-Cola’s marketing has also been top-notch. Few other brands have demonstrated the ability to easily bridge generational gaps and connect with consumers. Coke does this by promoting its party ties, as well as pushing social media marketing campaigns to reach young drink connoisseurs.
Coca-Cola may not be the growth story it once was, but it is riding a 60-year streak of increasing its base annual payment. Very few publicly traded companies have a longer active streak.
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