When it comes to investing greats, Berkshire Hathaway (BRK.A -0.27%) (BRK.B -0.14%) CEO Warren Buffett is arguably in a class of his own. Under Buffett's tutelage, Berkshire has an average annual return of 20% since 1965 and delivered an aggregate return for shareholders of more than 2,800,000%! What's more, he's done this without paying his shareholders a dividend.
But the thing about the Oracle of Omaha's investing strategy is that it's very much reliant on dividends. Following Berkshire's Form 13F filing with the Securities and Exchange Commission in mid-February, which disclosed all of the company's buying and selling activity from the fourth quarter, my back-of-the-hand calculation suggested that Berkshire would bring in approximately $4.36 billion in dividend income this year.
Yet, even with more than half of Buffett's 48 holdings doling out a payout, half of Berkshire Hathaway's 2021 dividend income ($2.16 billion, in aggregate) will be generated by just three stocks.
Apple: $744,199,004 in dividend income
By less than $1 million, tech kingpin Apple (AAPL 1.30%) remains Warren Buffett's most lucrative dividend stock, on a nominal basis. If Apple were to pay out $0.82 a share in 2021, and Berkshire Hathaway were to retain all 907,559,761 shares, Buffett's company would net a cool $744,199,004 in dividend income. Based on the roughly 1.53 million Class A shares (BRK.A) outstanding, this works out to $486 in dividend income per share.
Apple has been affably referred to by the Oracle of Omaha as his company's "third business," which gives us all the insight we need: Buffett's not selling.
As many of you probably know, Apple's success has long come from riding the coattails of its innovative products. The launch of the company's first 5G-capable iPhone late last year led to record iPhone sales in the fiscal first quarter. In the U.S., iPhone remains the top-selling smartphone, with the release of new products regularly drawing crowds to its stores.
But for Apple CEO Tim Cook, the company's future lies with services and wearables. While not abandoning the products that made Apple the company it is today, Cook is overseeing a transition that'll emphasize high-margin subscriptions. Eventually, this shift should level out Apple's lumpy revenue recognition and improve the company's operating margins.
As long as Apple continues to innovate and repurchase its own stock, the Oracle of Omaha should be a happy camper.
Bank of America: $743,653,444 in dividend income
Nipping at Apple's heels in the dividend income department is financial powerhouse Bank of America (BAC -1.24%). Following an OK from the Federal Reserve Bank of Richmond to increase his company's stake in BofA past 10%, Buffett has taken the opportunity to push Berkshire's stake to more than 1.03 billion shares. Based on a $0.72 annual payout, Bank of America should yield $743,653,444 in dividend income in 2021.
It's no secret that Warren Buffett loves bank stocks. The reason is simple: they're moneymakers. Even though recessions are inevitable, they typically only last a few months to a couple of quarters. By comparison, economic expansions often last years, or perhaps even longer than a decade. Bank stocks simply bide their time during short periods of weakness and rake in the dough during multiyear periods of economic expansion.
What's made Bank of America such a stud is the company's cost-cutting and willingness to invest in digital platforms. With more of its customers banking online or using its mobile app, BofA has been able to consolidate some of its branches. Doing so is helping to reduce noninterest expenses and allowing more revenue to flow to its bottom line.
Bank of America is also the most interest-sensitive of the big banks. A steepening yield curve, which is commonplace in a recovering economy, can portend higher yields on the horizon. When the Federal Reserve does take action and tightens monetary policy, Bank of America should be the prime beneficiary.
Coca-Cola: $672,000,000 in dividend income
The third stock that makes up a significant portion of Buffett's annual dividend income is none other than Berkshire Hathaway's longest-tenured holding, Coca-Cola (KO 0.72%). If we assume that Berkshire maintains its 400 million shares and Coke pays out a base dividend of $1.68 in 2021, Buffett's company will collect $672,000,000.
Coca-Cola may not be the growth juggernaut it once was, but it's arguably the best-known consumer-packaged goods company in the world. It's selling its products in all but two countries worldwide (North Korea and Cuba). This allows the company to generate highly predictable cash flow from developed countries, while generating faster organic growth rates from emerging markets. In total, it has over 20 brands bringing in at least $1 billion in annual sales.
Coke's success wouldn't be possible without its superior marketing, either. The company leans on point-of-sale advertising, well-known brand ambassadors, increasing digital ads, and holiday season tie-ins to reach consumers and cross generational gaps.
For Buffett, Coca-Cola has been a continuous holding since 1988. With a cost basis of $1.299 billion, the $672 million Berkshire is set to receive in 2021 works out to a yield on cost of 52%! Put another way, Coke's dividend alone allows the Oracle of Omaha to double his company's initial investment every two years. With a return like that, it's hard to see him ever selling this position.