Berkshire Hathaway (BRK.A -0.72%) (BRK.B -0.67%) CEO Warren Buffett is arguably the greatest investor of our time. Since the beginning of 1965, Buffett's conglomerate has delivered a compound annual gain of 20.3% in terms of its per-share market value. That compares with 10% on the nose for the broad-based S&P 500 (and that's with dividends included) over the same period. It may not sound like a hug gap, but the overall gain between Berkshire Hathaway and the S&P 500 since the beginning of 1965 isn't even close: 2,744,062% versus 19,784%. 

Obviously, one of the keys to Buffett's success in picking winning stocks has been his desire to hold companies for long periods of time. Letting his winners run has allowed his wealth to compound many times over in the latter years of his life.

But an oft-overlooked reason Buffett has done so well is that he's focused his attention on buying high-quality dividend stocks.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.

Dividend stocks are a big reason Buffett has been so successful for so long

According to a report published in 2013 by J.P. Morgan Asset Management, which examined the returns of various groupings of stocks over a 40-year period (1972-2012), companies that initiated and grew their dividend over this four-decade stretch returned an average of 9.5% per year. Comparatively, non-dividend-paying stocks averaged returns of only 1.6% per year over this same time span. That's a nearly 500% improvement if investors chose to buy dividend stocks.

This outperformance really shouldn't come as a huge surprise. After all, dividend stocks are usually profitable and have time-tested business models. They're, therefore, the perfect beacons of profitability to attract long-term investors.

There are other advantages, as well. For instance, companies that pay a regularly dividend can help assuage investor concerns when the stock market turns south, as it has over the past week and change. Although the yield an investor earns on their dividend stocks is likely to be far less than the actual downward move in the stock market during a correction, it certainly helps lessen the sting.

Dividends can also be reinvested back into more shares of dividend-paying stock via a dividend reinvestment plan, or DRIP. A DRIP is what money managers use to generate long-term wealth for their clients, and setting one up for the dividend stocks you own can often be done with a few clicks of your mouse.

A man placing crisp one hundred dollar bills into two outstretched hands.

Image source: Getty Images.

Buffett will reap the rewards of dividend income in 2020

As of the end of 2019, Berkshire Hathaway's 13F filing with the Securities and Exchange Commission showed it owned 52 securities (50 stocks and two exchange-traded funds/trusts). Of these 52 securities, 36 of them pay a dividend.

The big question is, just how much dividend income will the Oracle of Omaha rake in this year?

Although the yields on Berkshire's two exchange-traded funds/trusts are up to a little bit of interpretation, I took the time to calculate out, to the dollar, what every dividend stock is liable to pay out in 2020. The end result is I have Buffett's investment portfolio collecting $4,720,296,790 (that's more than $4.7 billion) in dividend income this year. Having ended the past week with $212.8 billion in invested capital, this works out to an annual yield on invested capital of 2.2%. Not too shabby, especially considering that 16 non-dividend-paying stocks are being factored into this calculation.

In total, Buffett has 10 companies that are providing Berkshire Hathaway with more than $100 million in dividend income this year:

  • Apple (AAPL -0.37%): $755,079,143 in estimated 2020 dividend income.
  • Bank of America (BAC 1.32%): $666,006,192.
  • Wells Fargo: $659,354,353.
  • Coca-Cola (KO -0.63%): $656,000,000.
  • Kraft Heinz: $521,015,709.
  • American Express (AXP 0.64%): $260,770,404.
  • US Bancorp (USB 1.80%): $222,532,158.
  • JPMorgan Chase: $214,253,755.
  • Delta Air Lines: $114,165,834.
  • General Motors: $114,000,000.
A bank teller handing cash back to a customer.

Image source: Getty Images.

Perhaps no surprise is that five of Buffett's top-10 dividend stocks hail from the financial sector. Close to half of Berkshire's assets are invested in financials, which makes sense given that banks are easily the favorite industry of Warren Buffett. Companies like Bank of America and US Bancorp have been hard at work reducing their operating expenses by closing physical branches and emphasizing digital banking and mobile apps. Even with yields falling and net interest income liable to decline for pretty much all money-center banks, Bank of America and US Bancorp's cost-reduction efforts, coupled with growth in noninterest income, should help offset any weakness.

Buffett also holds true to his winners. For instance, Coca-Cola has been a Berkshire Hathaway holding for more than three decades, while American Express has been a consistent holding for more than 25 years. As these two companies have appreciated in value and grown their payouts over time, Berkshire's annual yield based on the original cost basis for Coca-Cola and American Express has soared. Paying out almost $261 million annually, yet with a cost basis of only $1.287 billion, AmEx is providing a roughly 20% yield each year. Meanwhile, Coca-Cola's $656 million in annual dividends, relative to its $1.299 billion cost basis, means it provides a 50.5% yield from its initial cost basis every year. 

Warren Buffett's love for brand-name businesses that have clear-cut competitive advantages has also resulted in a dividend income windfall. For instance, smartphones have practically become a basic-need good for consumers in the U.S. -- and there's no company with greater smartphone market share in the United States than Apple. Beyond selling the iPhone, iPad, and Mac, Apple is using its top-tier innovation to transform itself into a wearables and services giant. Having multiple offerings within its universe of products and an extremely loyal customer base allows Apple to pay out one of the largest dividends on the planet, in terms of actual dollars being dispersed.

If there's one key takeaway from examining Warren Buffett's portfolio, it's to not overlook the power of dividend stocks.