Few if any investors have been as successful over the long run as Berkshire Hathaway's (BRK.A 0.32%) (BRK.B 0.41%) Warren Buffett. Since taking over as CEO in 1965, he's led his company's stock to an annual average return of 20%. Including the year-to-date return of the Class A shares (BRK.A), we're talking about an aggregate gain approaching 3,400,000%.
There are a number of reasons Buffett is a successful investor. For example, he buys stakes in businesses he understands well, and he often focuses on companies that have clear and sustainable competitive advantages. However, the biggest puzzle piece to the Oracle of Omaha's success might be his affinity for dividend stocks.
This year, Berkshire Hathaway is set to collect more than $5 billion in dividend income. Of this more than $5 billion, Buffett and his investing team will receive a little over $3.1 billion from just four stocks.
Bank of America: $867,595,685 in annual dividend income
Buffett's golden goose on the dividend front is money-center behemoth Bank of America (BAC 0.58%). With over 1 billion shares held in Berkshire Hathaway's portfolio, the $0.84 base annual payout from BofA will yield almost $868 million in dividend income over the next 12 months.
Bank of America is what you might call the prototypical Buffett stock. Like most bank stocks, it's a cyclical company that's primed to benefit from long periods of economic expansion. Even though recessions are an inevitable part of the economic cycle, they usually only last a few months or a couple of quarters. By comparison, periods of expansion are measured in years and allow BofA's bread-and-butter growth segments, such as loans and deposits, to thrive.
What makes Bank of America such an intriguing investment at the moment is its interest-rate sensitivity. No money-center bank sees its interest income potential move up or down more because of changes in the interest rate yield curve. According to the company, a 100-basis-point parallel shift in the interest rate yield curve would add an estimated $8 billion in net interest income over 12 months. When rates inevitably do rise, this added net interest income will go straight to its bottom line.
As one final note, Bank of America has done an excellent job with its digitization efforts. With more people than ever banking online or through mobile apps, BofA has been able to consolidate some of its branches and improve its operating performance.
Occidental Petroleum (preferred shares): $800,000,000 in annual dividend income
Though you won't see it listed in Berkshire Hathaway's portfolio, Buffett's company owns $10 billion worth of preferred stock from oil and gas company Occidental Petroleum (OXY -1.62%).
Back in 2019, Berkshire Hathaway provided $10 billion in financing to allow Occidental to acquire Anadarko Petroleum, which was also being courted by integrated oil and gas giant Chevron. In return for handing over $10 billion, Buffett's company was granted 100,000 preferred shares of Occidental Petroleum stock, each with a value of $100,000. Most importantly, these preferred shares yield a cool 8% annually. Although it remains Occidental's prerogative whether this dividend is paid in cash or with issued shares of Occidental Petroleum stock, Buffett and his team have the option of collecting this payout for at least a decade.
It should be noted that this deal also carries warrants to purchase up to 80 million shares of Occidental Petroleum stock at $62.50 per share. Although Occidental's share price is well below this mark at the moment, a sustainable rebound in oil prices and a successful deleveraging of its balance sheet might make these warrants worthwhile years down the road.
Despite Buffett and his team selling their common stock holdings in Occidental Petroleum, it's pretty evident they have no desire to part ways with this inflation-topping return of 8% each year from the preferred shares.
Apple: $798,652,590 in annual dividend income
Berkshire Hathaway's so-called "third business" is another source of big-time dividend income. Innovation kingpin Apple (AAPL 3.71%), the largest holding by far in Buffett's portfolio, is netting Berkshire almost $799 million annually.
Apple's success is a reflection of consumers' incredible loyalty to the company, its dominance in certain categories, and its innovation. For instance, it's the most dominant provider of smartphones in the United States. According to Counterpoint Research, iPhone sales have accounted for between 53% and 65% of all U.S. smartphone share over the past three quarters. That's more than double its next closest competitor, Samsung. Not surprisingly, customer lines often wrap around Apple's stores when new products are launched.
However, the future for Apple lies with its services and subscriptions. CEO Tim Cook is overseeing a long-term transition that'll emphasize these higher-margin platforms. Ultimately, services should reduce the revenue lumpiness associated with product cycles and improve long-term operating margins.
What often gets overlooked with Apple is what a capital return superstar it's been. Since reintroducing a quarterly dividend in the summer of 2012, Apple has increased its payout by 132%. What's more, Apple spent in the neighborhood of $380 billion repurchasing 10.6 billion shares of its own common stock since commencing its share repurchase program in 2013. In other words, Apple's shareholders are getting rewarded in a multitude of ways.
Coca-Cola: $672,000,000 in annual dividend income
Coca-Cola's consistent and growing profitability is a function of a couple of factors. First, it's working with incredible geographic diversity. With the exception of North Korea and Cuba, Coke sells its products in every other country around the world. This means a recession in a few countries won't necessarily hurt its profit potential.
To build on this point, Coca-Cola also possesses a 20% share of the cold-beverage market in developed markets, along with a 10% share of cold beverages sold in emerging markets. This position allows it to generate plenty of predictable cash flow from developed markets while leaning on the faster growth potential of developing markets. All told, the company has more than 20 global brands bringing in at least $1 billion in annual sales.
Coke's global brand awareness is tough to beat, as well. It's one of the most recognized brands in the world and has historically had little issue crossing generational gaps to reach consumers. With everything from holiday tie-ins to social media marketing at its disposal, Coke is as steady as they come in the profit department. Perhaps that's why it's raised its base annual payout for 59 consecutive years.