For more than 50 years, Berkshire Hathaway (BRK.A -1.14%) (BRK.B -1.07%) CEO Warren Buffett has been running circles around the broader market. According to the company's 2019 shareholder letter, Berkshire Hathaway has returned an average of 20.3% per year over a 55-year stretch. That compares to a 10% total return each year, inclusive of dividends paid, for the benchmark S&P 500 over this same span. This difference might not sound like a lot, but over a 55-year period, Berkshire Hathaway's stock has outperformed the S&P 500 by more than 2,700,000%.
Much of Buffett's success has been attributed to his knack for picking companies with sustainable competitive advantages and holding them for very long periods of time. However, dividend payouts are the silent heroes that have been padding the Oracle of Omaha's pockets for decades.
Historically speaking, a majority of the companies that Warren Buffett and his team have bought into pay a dividend. That's not entirely unsurprising given that dividend stocks are often profitable, have time-tested business models, and usually have transparent long-term outlooks.
Currently, Buffett's top four dividend stocks are expected to bring in over $2.7 billion in forward 12-month income on a combined basis.
Apple: $804.1 million
Perhaps it's no shock the company that comprised half of Berkshire Hathaway's invested assets as recently as a few weeks ago, Apple (AAPL 2.44%), is its biggest dividend payer. Despite yielding just 0.74%, Apple is one of the largest dividend payers on the planet, with the company doling out approximately $14 billion a year in payouts.
That might sound like a lot of money, but Apple can easily afford it. On a trailing-12-month basis, Apple has generated a cool $80 billion in operating cash flow and $71.7 billion in free cash flow. Its iPhone remains the hottest thing since sliced bread in the U.S. smartphone market, and the company is on the verge of unveiling its next-generation device (likely within the next couple of weeks or months) that'll be 5G capable. In other words, Apple's iPhone should benefit from a multiyear tech upgrade cycle and remain a dominant player in the U.S. smartphone market.
However, CEO Tim Cook isn't willing to just settle for being a products company. Cook is currently transitioning Apple into a services and wearables company. Services offer juicier margins and less revenue lumpiness than product sales, which should be long-term positives for Apple. Even during the coronavirus-impacted second quarter, services grew by 15% from the prior-year period to $13.2 billion.
Bank of America: $743.7 million
With the Oracle of Omaha continuing to pare down Berkshire's stake in longtime holding Wells Fargo, it's pretty clear that there's a new favorite buy-and-hold bank stock: Bank of America (BAC 0.83%). Having received permission from the Federal Reserve Bank of Richmond to exceed a 10% stake in BofA, Buffett's more than 1-billion-share stake in the company should yield almost $744 million in dividend income over the next year.
Why so much love for Bank of America? One possibility is that Buffett and Co. are getting ahead of the curve and preparing for a robust rebound in the U.S. economy. Buffett has always been a fan of betting on America over the long term, and BofA is probably the most interest-sensitive of all U.S. banks. It could be some time before we see a significant uptick in interest income for Bank of America, but when it happens, earnings growth could soar.
Warren Buffett is also a big fan of the company's capital return strategy. Had the coronavirus pandemic not sent the U.S. economy into its first recession in 11 years, BofA would have been on track to repurchase about $31 billion in stock between July 2019 and June 2020.
As one final note, BofA's cost-cutting initiatives deserve a tip of the hat. By focusing on improving digital engagement, Bank of America has been able to reduce its physical branch count and somewhat minimize noninterest expense growth.
Coca-Cola: $656 million
Another dividend stock that continues to deliver for the Oracle of Omaha year in and year out is beverage giant Coca-Cola (KO -0.75%). Coca-Cola is Berkshire's longest-tenured holding (32 years), and based on the company's initial cost basis of $3.245, Buffett is now receiving a better than 50% yield on cost each year.
One aspect that makes Coca-Cola so great is the company's geographic diversity. With the exception of North Korea and Cuba, you can find Coca-Cola products in every country around the globe. This allows Coca-Cola to generate highly predictable sales in developed markets, while also taking advantage of faster growth environments in developing and emerging markets.
Furthermore, don't overlook the importance of a brand name and advertising quality. Coca-Cola has one of the most recognized logos in the world, and it's one of the best at engaging with consumers. Coca-Cola has strong ties with Santa Claus and the holiday season, and has not been shy about using professional athletes and popular social media figures as brand ambassadors.
Coca-Cola is never going to wow investors with its growth potential, but you'll never go to sleep worried about how the company would fare if a global recession struck. That's why Buffett continues to stick with one of the best investments of his career.
Kraft Heinz: $521 million
Fourth and finally, we have one of the worst investments of Buffett's longtime tenure as CEO, Kraft Heinz (KHC -1.52%). But even after slashing its dividend by 36% in early 2019, the company is still delivering $521 million a year in dividend income to Berkshire Hathaway.
The issue for Kraft Heinz is that Heinz grossly overvalued Kraft Foods when it was acquired in July 2015. This resulted in the company booking a more than $15 billion goodwill impairment charge in February 2019, along with that aforementioned dividend cut. Kraft Heinz spent much of 2019 looking for ways to reduce its debt, including through the sale of noncore assets. Unfortunately, there haven't been many interested parties.
Thankfully for Buffett, the pandemic has increased demand for consumer packaged goods. In the recently reported second quarter, Kraft Heinz saw net sales rise almost 4%, with organic sales growth of 7.4%. Even pricing played a role, with price hikes accounting for 2.2% of the 7.4% increase in organic sales growth.
But there's no question that Kraft Heinz remains a work in progress. As a major shareholder, Buffett isn't able to exit the position without further hurting Kraft Heinz's share price. Thus, for now, he's stuck with his company's stake. However, with each passing year that Berkshire is able to collect $521 million in dividend income, the sting of this bad investment probably hurts a little less.