I recently counted the number of high-yield dividend stocks Warren Buffett had in his Berkshire Hathaway portfolio. The total came to 12 -- more than I had anticipated.
It appears that Buffett likes high-yield dividend stocks more than I thought, and there's one that the legendary investor seems to be more bullish about than any other: Chevron (CVX 0.60%). Buffett has $20 billion invested in this high-yield dividend stock. Here's why he could buy more shares.
Why Buffett likes Chevron
Buffett only invests in a stock if he believes its valuation is attractive relative to its potential long-term earnings growth. If we had to identify one reason he likes Chevron, this would be it.
The stock certainly appears to be valued attractively, based on its near-term earnings growth. Chevron's shares trade at less than 12.5 times expected earnings. That's much lower than the forward earnings multiple of 21 for the S&P 500. It's also below the 13.1 multiple for the S&P 500 energy sector.
However, these metrics only look 12 months into the future. Buffett prefers to project earnings growth for at least five years out. Based on the Oracle of Omaha's public comments, we can safely assume that he expects Chevron to deliver solid earnings growth for years to come. He told CNBC's Joe Kernen last year the world "will be producing more oil in five years from now, or about the same amount."
Buffett acknowledges the challenges presented by climate change, though. He undoubtedly approves of Chevron's major investments in carbon capture technology because he has expressed support for Occidental Petroleum's carbon capture initiatives. Occidental ranks as Berkshire's sixth-largest holding, one spot behind Chevron.
The oil company's dividend program likely appeals to Buffett, as well. With the company's dividend yield of over 4%, the stock doesn't have to appreciate too much to deliver solid total returns.
A potential catalyst could be on the way
There's one factor that we can safely rule out as a reason Buffett has invested so heavily in Chevron: He isn't attempting to predict oil prices. The Oracle of Omaha wrote to Berkshire Hathaway shareholders earlier this year, "No one knows what oil prices will do over the next month, year, or decade."
However, I suspect if he were pressed on the subject, Buffett would say that he thinks oil prices are more likely to rise than fall over the next several years. Why? He respects Occidental CEO Vicki Hollub. And Hollub expects oil prices will rise.
Hollub stated at the World Economic Forum in January that there will be a supply shortage of oil by the end of 2025. That prediction might be surprising, considering the current oversupply situation in global oil markets.
The CEO pointed out, though, that oil companies are currently discovering new oil deposits that are only around 25% of the amount of oil used. She thinks the world will need more oil soon, a dynamic shift that will cause oil prices to increase significantly.
If Hollub is right, both Chevron and Occidental will benefit. And so will Buffett and Berkshire Hathaway.
Will Buffett increase Berkshire's stake in Chevron?
Just because Buffett likes Chevron doesn't necessarily mean he'll increase Berkshire's stake in the oil giant. However, I think the chances are pretty good that he will.
For one thing, Chevron was one of only three stocks Buffett bought in the fourth quarter of 2023. He didn't just nibble, either: Berkshire's position in Chevron increased by 14.4%. While Chevron's share price has risen since 2023 Q4, it's still near the levels in the third quarter of 2022 -- when Buffett previously bought more shares.
Berkshire also has a huge cash stockpile of over $167 billion. With many stock valuations at high levels, Buffett hasn't found many good alternatives to use this cash. As previously mentioned, Chevron remains attractively valued.
There's no guarantee that Buffett will buy more shares of Chevron. But I won't be surprised if Berkshire's stake in the oil and gas producer is a little higher when the 13F regulatory filing for 2024 Q1 is available.
