Few CEOs have delivered the green to their shareholders quite like billionaire Warren Buffett. Since taking the helm of conglomerate Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%) in 1965, he's led his company to an average annual return of 20%. That might not sound all too nominally impressive, but he's overseen the creation of over $600 billion in shareholder value and a return of almost 3,400,000% for the company's Class A shares (BRK.A).
The Oracle of Omaha's success is based on a number of factors, such as his focus on sectors that he understands well and his leanings toward cyclical companies. But what might arguably be Berkshire's biggest tailwind is Warren Buffett's affinity for dividend stocks. This year, Berkshire Hathaway is set to collect more than $5 billion in dividend income.
Income investors always want the highest yield possible with the least amount of risk. Unfortunately, the data shows that risk and yield tend to be correlated once you hit high-yield status (i.e., yields of 4% or higher). But that hasn't stopped Buffett and his investment team from piling into these three high-yield dividend stocks.
Chevron: 5.4% yield
Taking the 8% annual yield Berkshire Hathaway is netting from its preferred shares of Occidental Petroleum out of the equation, none of the nearly four dozen stocks in the company's portfolio are paying out more than integrated oil and gas giant Chevron (CVX -0.80%). Based on Berkshire's more than 23.1 million shares owned, it's on track to collect almost $124 million in dividend income over 12 months.
One reason Chevron is such an attractive income stock is its integrated operating model. By owning upstream (drilling and exploration) and downstream assets (refineries and petrochemical plants), it's able to generate substantial cash flow in any economic environment. Even though its upstream assets bring in the juiciest margins, a drop in crude oil prices reduces the input costs for its downstream assets. Being able to hedge against even the worst recessions has helped ensure this dividend remains one of the highest among major oil stocks.
Another reason Chevron has been a rock-solid dividend payer and is likely adored by Buffett and his investing team is the company's balance sheet. Although it does have approximately $43 billion in total debt, this works out to only a 32% debt-to-equity ratio. That's markedly lower than most integrated oil stocks and signifies that Chevron has more financial flexibility than its peers.
It doesn't hurt that the U.S. and global economy are in the early stages of what could be a multiyear bull market, either. This bodes well for the price of crude oil over the next couple of years.
AbbVie: 4.8% yield
Warren Buffett and his team also seem to love pharmaceutical stock AbbVie (ABBV 1.26%), which is parsing out a nearly 5% yield. With Berkshire Hathaway holding north of 20.5 million shares, the company is set to collect about $106.7 million in dividend income over the next 12 months.
It's no secret that anti-inflammatory drug Humira is what makes AbbVie tick. Prior to the development of coronavirus vaccines, Humira was the top-selling drug in the world. It has 10 approved indications in the U.S., 14 indications internationally, and is pacing approximately $20 billion in global sales this year.
The interesting thing is that Humira continues to expand, even with biosimilar competition being introduced in international markets. Humira's multiple indications and its global reach effectively ensure that it'll remain a cash cow for AbbVie for a long time to come.
The big knock against this company has long been its reliance on Humira for the bulk of its revenue. But management is tackling this concern head-on. Last year, AbbVie completed a cash-and-stock purchase of Allergan. This deal added blockbuster drug Botox into the fold -- Botox has both therapeutic and cosmetic applications -- and it'll result in more than $2 billion in cost synergies by the end of the third year. With a more diverse product portfolio and pipeline, AbbVie is set to deliver for its shareholders.
Verizon Communications: 4.7% yield
Last, but certainly not least, is telecom stock Verizon (VZ -0.39%), which is Buffett's unquestioned favorite high-yield dividend stock. As of Sept. 23, Verizon was the eighth-largest holding in Berkshire Hathaway's portfolio. With more than 158.8 million shares held, the Oracle of Omaha's company is netting about $406.6 million in dividend income per 12 months. This payout, coupled with historically low Treasury yields, likely played a big role in Buffett's decision to pile into Verizon over the previous two quarters.
Aside from its market-crushing and inflation-tempering payout, Verizon is set to benefit from two key catalysts. First, there's the ongoing rollout of 5G wireless infrastructure. It's been a decade since wireless download speeds were dramatically improved, meaning there'll likely be a strong response from consumers and businesses looking to upgrade their wireless devices. This device replacement cycle should last years and lead to a significant uptick in data consumption, which happens to be where the company's juiciest margins lie.
Additionally, the company spent big bucks acquiring 5G mid-band spectrum earlier this year. The goal is to expand the company's 5G wireless broadband services to as many as 30 million U.S. households by the end of 2023. In-home broadband isn't the growth story it once was, but it does generate highly predictable cash flow and create the potential for higher-margin service bundles or add-on sales.
It's also worth noting that Verizon is one of the least volatile large-cap companies. With a 52-week trading range of about $8 and the company generating almost $39 billion in trailing 12-month operating cash flow, buying Verizon stock is about as safe as it gets for income-seeking investors.