Investors with cash to spare could do a lot worse than browse the holdings of Warren Buffett's Berkshire Hathaway (BRK.A -0.58%) (BRK.B -0.46%). Buffett and his investment team have beaten the market for decades by following an effective and common-sense approach to selecting stocks.
Two relatively inexpensive Buffett stocks that look poised to reward shareholders are Apple (AAPL 2.11%) and Chevron (CVX -1.39%). Here's why these stocks would be good places to park some cash for 2022 and beyond.
Apple: The 5G upgrade cycle is in full swing
Apple is Warren Buffett's biggest investment holding at Berkshire right now. Buffett originally invested $36 billion in the stock between 2016 and 2018. The Oracle of Omaha's timing is not always perfect, but this investment plays to Buffett's image as a magician with stock picking. Apple's share price has risen more than 300% since the end of 2018.
The market value of that investment makes up roughly a third of Berkshire Hathaway's book value (total assets minus all liabilities). That's a good vote of confidence by the greatest investor of all time.
Buffett sees a tight bond between Apple's brand and the consumer. That sticky relationship is reflected in Apple's growing installed base of active devices. In January, Apple CEO Tim Cook disclosed that the company had more than 1.8 billion active devices, up from 1.65 billion at the beginning of 2021.
The outlook for further growth in the installed base looks very favorable in the near term. The launch of the iPhone 13 drove a record holiday quarter, with iPhone revenue increasing 9% year over year to $72 billion. Apple is set to launch a budget-friendly 5G iPhone SE model this year, which is expected to drive even more upgrades.
It's a bonus that a strong upgrade cycle for the iPhone will also lead to more spending in higher-margin services, such as apps and subscriptions. Over the trailing-12-month period through December, Apple generated a staggering $101 billion in free cash flow, which is the actual amount of cash a business generates after all costs and expenses, and management continues to return excess cash to shareholders in dividends and share repurchases.
It's no wonder Buffett continues to hold Apple stock. It's got an exceptional brand and a highly profitable business. Apple would make a solid addition to any investor's holdings this year.
Chevron: A rebate on higher gas prices
Consumers' wallets are getting hit at the pump, but the perfect antidote to that is to follow Buffett and consider buying shares of Chevron.
The oil producer has increased its dividend for 34 consecutive years, and currently pays an above-average dividend yield of 4.1%. Even though the stock has rebounded in recent months, Warren Buffett bought an additional 10 million shares of Chevron stock during the fourth quarter, so he might still view the current price level as a good buying point. The stock has risen about 14.7% since the end of 2021.
Buffett likes to invest in well-managed industry leaders, and Chevron meets that criteria. Even with oil prices falling over the last decade, it was able to grow free cash flow to fund an increasing dividend through 2019.
Moreover, management made a well-timed acquisition of Noble Energy in late 2020. Noble strengthened Chevron's upstream exploration and production business just as energy prices were beginning to recover from the lowest levels seen in nearly 20 years.
Chevron can generate profits with oil prices of at least $45 a barrel (they are currently hovering around $105 a barrel), but the company is simultaneously investing to achieve net-zero carbon emissions by 2030. Management has reduced its capital spending over the last two years and is reallocating resources to growing its hydrogen and renewable fuel businesses, which should generate more than $1 billion in additional free cash flow within a decade.
The quarterly dividend recently increased by $0.08 to $1.42 per share, which will be paid out on March 10 to shareholders of record on Feb. 16. For the full year, management expects to triple its share repurchases to $3 billion to $5 billion, which could boost growth in earnings per share and fuel more returns for investors.
Chevron's growing dividend along with higher oil prices makes it a great hedge against inflation in the near term. With the stock trading at a relatively inexpensive forward price-to-earnings ratio of 12.4, investors can also expect some capital appreciation if oil prices continue to climb.
All said, a high-yield oil stock would be a perfect complement to a growth stock like Apple in 2022.