When Berkshire Hathaway (BRK.A -0.64%) (BRK.B -0.81%) CEO Warren Buffett buys or sells a stock, Wall Street and retail investors tend to pay close attention. That's because the Oracle of Omaha, as he's come to be known, has averaged -- averaged! -- a 20.1% annual return since taking the reins in 1965.
There's a laundry list of reasons that explain why Buffett has been such a successful investor. In no particular order, he thinks long term, stays focused on a small subset of sectors and industries he fully understands, piles into cyclical stocks, and runs a relatively concentrated portfolio.
But perhaps the biggest advantage is that Berkshire Hathaway's portfolio is packed with dividend stocks. Dividend stocks have a history of handily outperforming non-dividend payers, and Buffett's company looks to be on pace to collect north of $6 billion in dividend income over the next year. Amazingly, $4.3 billion of this passive income will originate from just five stocks.
Chevron: $990,920,111 in annual passive income (estimated)
The dividend kingpin of Warren Buffett's portfolio goes to integrated oil and gas stock Chevron (CVX 0.84%). Although we won't know precisely how many shares Berkshire Hathaway owns of Chevron until the company files Form 13F with the Securities and Exchange Commission, a fair value estimate provided by Berkshire at the end of March allows for a close approximation. Using this estimate, Berkshire Hathaway looks to be on track to collect nearly $1 billion in passive income over the next 12 months.
Although some investors might be a bit leery of putting their money to work in oil stocks with the memory of the pandemic-induced crude-oil plunge still fresh in their minds, Buffett has been gung-ho on the industry in 2022.
It's certainly easy to be optimistic about Chevron, given its integrated operations. Although the drilling and exploration side of the business generates the juiciest margins, Chevron also owns midstream (e.g., pipelines and storage) and downstream (e.g., refineries and chemical plants) assets that can act as a hedge when crude and/or natural gas prices fall.
Midstream businesses typically work with volume-based or fixed-fee contracts that lead to predictable cash flow. Meanwhile, downstream energy companies benefit from lower input costs when energy prices decline.
With crude oil and natural gas pushing to multidecade highs, and Chevron pledging to buy back $10 billion worth of its stock by the end of this year, the company checks all the right boxes for Buffett.
Bank of America: $867,595,685 in annual passive income
Bank stocks are Buffett's favorite industry to invest in, and often an excellent source of sustainable dividend income. Berkshire's second-largest holding, Bank of America (BAC 1.54%), is currently on pace to generate more than $867 million in passive income for Buffett's company over the next 12 months.
The beauty of bank stocks is that they're cyclical and generally very predictable. Even though recessions are an inevitable part of the economic cycle, they tend to be short-lived. By comparison, economic expansions can go on for many years. Buying bank stocks like BofA gives Buffett a way to take advantage of these disproportionately longer expansion cycles.
Something else to appreciate about Bank of America is the company's interest-rate sensitivity. No big bank sees its net interest income rise or fall more profoundly when the interest-rate yield curve shifts than BofA. That's great news, because the Federal Reserve has pledged to get aggressive with interest rates to rein in historically high inflation. Bank of America estimates that a 100 basis-point parallel shift in the interest-rate yield curve will add $5.4 billion in net interest income over 12 months.
While the Fed has the final say on capital-return programs for U.S. money-center banks, Bank of America CEO Brian Moynihan has not been shy about returning a lot of money to shareholders via buybacks and dividends (when allowed to do so).
Coca-Cola: $704,000,000 in annual passive income
Warren Buffett's longest-tenured holding has also played a big role in his company's success. Based on Berkshire's cost basis for Coca-Cola (KO 0.34%) of around $3.25/share, the company's $1.76 base annual payout works out to a yield on cost of a whopping 54%! Coca-Cola has raised its base annual payout in each of the past 60 years.
The great thing about Coca-Cola is the company's geographic diversity. Its products are currently sold in all but three countries worldwide (Cuba, North Korea, and Russia, the latter due to the Ukraine-Russia war). This allows Coke to take advantage of the predictable demand from developed markets, as well as grow at a faster organic rate in emerging markets.
Furthermore, Coca-Cola has some of the best brand recognition in the world, which is a testament to the company's top-tier marketing. Whether the company is relying on celebrity ambassadors, social media campaigns, or its holiday tie-ins, it's never had any trouble transcending generational gaps and connecting with consumers.
Considering that Buffett is more than doubling his initial investment in Coca-Cola from payouts alone every two years, it's unlikely his 400 million-share stake will be sold or pared down anytime soon.
Occidental Petroleum: $873,975,521 in annual passive income
Arguably the most surprising company on this list is oil and gas exploration and production company Occidental Petroleum (OXY -0.54%). Berkshire Hathaway is set to collect $800 million in preferred stock dividends over 12 months, as well as $73,975,521 in passive income from its common stock position. The preferred dividend stake comes from a $10 billion investment Berkshire made in Occidental in 2019 to aid in the latter's acquisition of Anadarko.
Unlike Chevron, which is well-hedged, Occidental looked like it was going to become one of Buffett's worst investments when the pandemic hit. As a predominantly upstream company, Occidental wasn't able to handle the haircut to West Texas Intermediate crude oil prices. At one point, the company even resorted to paying Berkshire Hathaway's quarterly preferred dividend in common stock, as opposed to cash, in order to conserve capital.
It's a completely different story now. Last year, the company generated almost $10.3 billion in operating cash flow, while reducing long-term net debt by slightly more than $6 billion. Although work remains to be done to give Occidental better financial flexibility (net debt is still above $29 billion), the aforementioned multidecade highs for oil and gas should result in boatloads of operating cash flow this year.
Apple: $834,954,980 in annual passive income
Last but not least is Apple (AAPL 0.68%), Berkshire Hathaway's largest holding by a mile! Apple accounts for roughly 40% of Buffett's investment portfolio, and the more than 907 million shares held should generate almost $835 million in passive income over the next year.
From the Oracle of Omaha's viewpoint, Apple is one of Berkshire Hathaway's four "giants." In other words, it's one of the key value determinants of Berkshire Hathaway's business. It's also a company that checks all the appropriate boxes for Buffett.
For instance, Apple is one of the most-recognized brands in the world and has an incredibly loyal customer base. It's the leading smartphone brand in the U.S., as well. Following the introduction of 5G-capable iPhones during the fourth quarter (Q4) of 2020, Apple's iPhone market share rocketed 40% in the preceding quarter to 65% in Q4 2020.
Aside from its history of successful product innovation, the company is also transforming itself into a services powerhouse. Leaning on subscription services should help reduce the revenue fluctuations experienced during product-replacement cycles. Plus, the margins associated with subscription services are often higher than the products Apple sells.
The icing on the cake is Apple's capital-return program. Recently, the company lifted its dividend by 5% and approved another $90 billion in share buybacks.