Berkshire Hathaway (BRK.A -0.64%) (BRK.B -0.81%) CEO Warren Buffett has a knack for making money. The Oracle of Omaha, as he's come to be known, has a net worth above $114 billion, not counting the $41 billion he's donated to charity since 2006. More importantly, he's created over $700 billion in shareholder value since taking the reins as CEO in 1965.
Warren Buffett's success over the past 57 years has been dependent on a long list of factors, such as his narrow research focus and a desire to allow his investments to play out over long periods of time. But what might be Buffett's greatest ally is his love of dividend stocks.
Dividend-paying companies are often profitable and time-tested. Even better, they have a long history of crushing their non-dividend-paying peers in the return column. Perhaps it's not surprising that, out of the more than $5 billion Berkshire Hathaway is expected to collect in payouts annually, just six stocks will contribute a combined $4.07 billion in dividend income.
1. Bank of America: $867,595,685 in annual dividend income
The answer to the $64,000 question, "Which stock puts the most cash into Warren Buffett's pockets each year?" is banking giant Bank of America (BAC 1.54%). BofA is Berkshire's second-largest holding, by market value, and its $0.84 annual payout equates to nearly $868 million in yearly dividend income.
Bank of America's bottom line looks to be on the verge of exploding higher. That's because no money-center bank is more interest-sensitive than BofA. With U.S. trailing 12-month inflation hitting 7.5% in January, aggressive interest rate hikes from the Federal Reserve are now on the table. These rate hikes allow banks to generate more from the variable-rate loans they have outstanding. According to Bank of America, a 100-basis-point parallel shift in the interest rate yield curve would provide the company with an estimated $6.5 billion in added net interest income.
What's more, Bank of America CEO Brian Moynihan has not been shy about rewarding shareholders. Even though BofA and its money-center peers need the OK from the nation's central bank to return capital to shareholders, higher interest rates will likely allow the company to aggressively repurchase its common stock and, once again, raise its dividend by late June.
2. Occidental Petroleum (preferred shares): $800,000,000 in annual dividend income
What if I told you that Warren Buffett's second-highest dividend income-producing security was an oil stock? This year, and for many years to come, Berkshire Hathaway will net $800,000,000 in aggregate payouts from preferred shares of Occidental Petroleum (OXY -0.54%).
In 2019, the Oracle of Omaha provided $10 billion to Occidental to aid with its takeover bid of Anadarko Petroleum, which was also being pursued at the time by Chevron. In exchange for this $10 billion, Berkshire received 100,000 preferred shares of Occidental stock, each bearing an 8% annual yield. Berkshire has the option of collecting this payout for a minimum of 10 years, although Occidental has the choice of paying this preferred dividend in cash or with common shares of its stock.
Knowing Buffett, he'd much prefer Occidental pay its preferred dividend in cash. The good news here is that, with West Texas Intermediate crude oil rebounding to a 2014 high and natural gas prices climbing, Occidental Petroleum is likely to see a dramatic rebound in its operating cash flow. This means cash dividends are more likely.
3. Apple: $798,652,590 in annual dividend income
That "fruit company" also puts quite a few greenbacks into Warren Buffett's pockets each year. Apple (AAPL 0.68%), which accounts for nearly 45% of Berkshire Hathaway's invested assets, should produce almost $799 million in dividend income for Buffett's company over the next year.
Despite its minuscule yield of 0.5%, Apple doles out one of the largest nominal dividend payouts on Wall Street -- about $14.3 billion annually. This payout is easily financed with the more than $112 billion in operating cash flow Apple brought in over the trailing 12 months. The introduction of 5G-capable iPhones, coupled with the incredible brand loyalty of its customers, helped the world's largest publicly traded company set records for revenue and profitability in fiscal 2021.
However, Apple's future will hinge less on products and more on the service ecosystem. Apple's subscription services can help minimize the revenue lumpiness associated with product replacement cycles. It also doesn't hurt that services can produce better margins over time than its products.
4. Coca-Cola: $672,000,000 in annual dividend income
Berkshire Hathaway's longest-tenured stock is also quite the money machine. Beverage behemoth Coca-Cola (KO 0.34%) has been a continuous holding for Buffett's company since 1988, with its $1.68 annual payout set to deliver $672 million in dividend income. Keep in mind, though, Coca-Cola is working on a 59-year streak of increasing its base annual payout, and its 60th annual increase could come as soon as this week.
If you're wondering what makes Coca-Cola such a rock-solid company, look no further than its geographic diversity and marketing. Coke has operations in all but two countries worldwide (North Korea and Cuba). This means it's able to take advantage of the predictability of sales in developed markets, while benefiting from growth potential in emerging markets. Coca-Cola currently controls 20% of the cold-beverage market share in developed markets, along with a 10% cold-beverage share in emerging markets.
As noted, Coke's marketing strategy is top-notch. It's one of the most-recognized brands in the world. Coke is no stranger to using everything from its holiday tie-ins to social media and well-known brand ambassadors to bridge generational gaps and engage with consumers.
5. Kraft Heinz: $521,015,709 in annual dividend income
Keep in mind that even the world's best investors get it wrong from time to time. Even though consumer-packaged goods company Kraft Heinz (KHC 1.17%) is expected to put over $521 million in Berkshire Hathaway's coffers over the next year, this has been a poor investment for Buffett and his team.
Perhaps the biggest issue is Kraft Heinz's balance sheet. The Oracle of Omaha has previously stated that Heinz overpaid for Kraft Foods, leading to a balance sheet that's been bogged down by a mountain of goodwill and debt. The company simply doesn't have the capital it needs to reignite interest in its brands, which is why it's been looking to sell noncore brands for the past couple of years.
If there is a silver lining, it's that the coronavirus pandemic has lifted demand for prepackaged foods. With people choosing to eat home more often, Kraft Heinz's meals and snacks have done well. But this silver lining could quickly tarnish with inflation hitting a 40-year high. As prices climb, Kraft Heinz will be forced to choose between lifting its own prices and potentially chasing away some of its customers, or (pardon the pun) eating some of its higher supply costs.
6. Verizon Communications: $406,590,912 in annual dividend income
Lastly, there's telecom stock Verizon (VZ 0.65%), which sports one of the highest dividend yields in Berkshire Hathaway's portfolio at 4.8%. Berkshire's eighth-largest holding is on pace to generate more than $406 million in annual dividend income.
The beauty of telecom stocks like Verizon is they're highly defensive and extremely recession-resistant. This is to say that wireless and landline users tend to treat their phones as basic necessities in any economic environment. For Verizon, it means highly predictable cash flow and the ability to parse out a sizable percentage of its earnings as a dividend.
At the moment, Verizon has two key catalysts in its sails. First, the ongoing rollout of 5G wireless infrastructure should lead to a multiyear smartphone replacement cycle. As data usage increases, so should the company's operating margins for its wireless segment.
Second, there's a sizable opportunity for Verizon to grow its at-home 5G broadband service. The company has gobbled up mid-band spectrum with the goal of reaching 30 million U.S. households by the end of 2023.