Since taking over as CEO of conglomerate Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) in 1965, Warren Buffett has put on an investing clinic. The Oracle of Omaha, as he's come to be known, has created more than $610 billion in value for his company's shareholders, as well as delivered an aggregate return on his company's Class A shares (BRK.A) of greater than 3,600,000%, as of Dec. 31, 2021.
While there's a laundry list of reasons encompassing the Oracle of Omaha's investing success, such as his portfolio concentration and willingness to hold investments for the long term, Buffett's affinity for buying dividend stocks may be the most direct reason Berkshire Hathaway has been so successful.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Companies that regularly pay a dividend are often profitable and time tested. Further, studies have shown that income stocks have handily outperformed non-dividend payers over long periods. In other words, dividend stocks are built to outperform over the long run, and Warren Buffett has packed his company's portfolio with passive-income juggernauts.
Over the next 12 months, Berkshire Hathaway is set to collect more than $6 billion in payouts. However, just five stocks are expected to net Warren Buffett $4.25 billion in combined annual dividend income. Take note that the projected dividend income figures below include shares held by New England Asset Management (NEAM), an investment firm that Berkshire Hathaway owns.
Bank of America: $908,909,765 in dividend income over the next 12 months
By a small margin, money-center giant Bank of America (BAC 3.35%) is slated to be Warren Buffett's dividend king over the next 12 months. Taking into account the shares owned by NEAM, as well as BofA's recent admission that it plans to increase its quarterly payout by roughly 5% to $0.22, Berkshire Hathaway is on track to collect almost $909 million in annual dividend income.
It's no secret that Warren Buffett loves bank stocks. Although banks can't escape the inevitable weakness that accompanies recessions, their cyclical nature allows them to take advantage of disproportionately long periods of economic expansion. By purchasing and holding an assortment of bank stocks, Buffett is allowing Berkshire Hathaway's portfolio to benefit from the natural expansion of the U.S. and global economy.
Something a bit more specific to Bank of America is that it's the most interest-sensitive of the big banks. With the Federal Reserve having no choice but to rapidly increase interest rates in order to tame inflation, no large bank is in better position to benefit from a boost in net-interest income than BofA.
Back in April, the company estimated that a 100-basis-point parallel shift in the interest rate yield curve would generate an added $5.4 billion in net-interest income over 12 months. For context, the Fed has already increased its federal funds target rate by an aggregate of 150 basis points in just the past three meetings.
Chevron: $904,131,705
Major energy stock Chevron (CVX 1.54%) is right on BofA's heels in the dividend-income generation department. With more than 159.1 million shares of Chevron held, Buffett's company is on pace to collect over $904 million in dividend income from the oil and gas giant over the next 12 months.
Buffett and his team absolutely piled into Chevron during the first quarter, which is likely an indication that the Oracle of Omaha expects crude oil and natural gas prices to remain elevated for many quarters or years to come. As a reminder, major energy players like Chevron were forced to pare back their capital investments during the coronavirus pandemic due to uncertainty. Add in Russia's invasion of Ukraine, and it's easy to see how the global energy supply chain remains challenged for years to come.
Chevron is a particularly smart play given its integrated operating model. Although it generates its juiciest profits from drilling and exploration, Chevron also operates transmission pipelines, refineries, and chemical plants. These midstream and downstream assets can act as a hedge when the price of crude and/or natural gas is falling. These ancillary operations have proved critical to Chevron sustaining its superior dividend.
Image source: Getty Images.
Occidental Petroleum: $893,465,783 (includes preferred stock dividends)
Another energy stock that's a passive-income powerhouse for Warren Buffett is integrated oil and gas company Occidental Petroleum (OXY 0.89%). Buffett's company is collecting a $0.52 annual payout on the more than 179 million shares of common stock currently owned, and is also reaping the reward of an 8% yield on $10 billion worth of preferred stock. On a combined basis, that's more than $893 million in total income expected from Occidental over the next 12 months.
As with Chevron, Buffett's fascination with Occidental looks to be entirely tied to the idea that energy commodity prices will remain elevated for some time. Even though Occidental is an integrated business with transmission assets and chemical plants, it generates the vast majority of its income from its drilling assets. In other words, Occidental gives Berkshire Hathaway more exposure to historically high upstream drilling profits.
The one thing worth noting about Occidental Petroleum is that its balance sheet isn't nearly on as solid footing as Chevron. Occidental's 2019 acquisition of Anadarko buried the company in debt. Although it's making headway on repaying its debt, thanks to multidecade highs for oil and natural gas, Occidental Petroleum still has a long way to go to fortify its balance sheet and improve its financial flexibility.
Apple: $838,439,808
Seeing as how it's Berkshire Hathaway's largest investment position by a mile, it should come as no surprise that technology stock Apple (AAPL -1.22%) is slated to be a top income stock for Warren Buffett. Including assets held by NEAM, Buffett should collect more than $838 million in dividend income from Apple over the next year.
The reason Apple comprises over 41% of Berkshire Hathaway's nearly $331 billion of invested assets is simple: It checks all the appropriate boxes. Apple has an exceptionally loyal customer base, is one of the world's most-recognized brands, and innovation has consistently pushed its products into relevancy. Since Apple introduced its first 5G-capable iPhone, the company has controlled 50% or more of the U.S. smartphone market in five of the past six quarters (not counting the recently ended second quarter).
Apple is also a company in transition. CEO Tim Cook is overseeing a push that emphasizes subscription services. Keep in mind that Apple isn't abandoning the products that made customers loyal to the brand in the first place. Rather, it's enhancing its platform, boosting its long-term operating margins, and reducing the revenue lumpiness associated with product replacement cycles.
I'd be remiss if I didn't also note that Apple has repurchased an almost unfathomable $499 billion worth of its common stock since instituting a share buyback program in 2013.
Coca-Cola: $704,000,000
Last but not least, Warren Buffett nets a small fortune every year from beverage stock Coca-Cola (KO 2.14%). The longest-tenured holding in Berkshire Hathaway's portfolio is expected to dole out $704 million in dividend income to Buffett's company over the coming 12 months.
One reason Coca-Cola hasn't fizzled out over many decades is its geographic diversity. Except for North Korea, Cuba, and Russia (the latter being due to its invasion of Ukraine), Coca-Cola is operating in every other country around the world. This allows Coke to take advantage of highly predictable operating cash flow in developed markets, as well as lean on higher organic growth potential in emerging markets.
Similar to Apple, Coke's branding power is invaluable. This is one of a few companies that has no issue transcending generational gaps to forge emotional connections with consumers. Coke can lean on its brand ambassadors to reach a new generation of younger consumers via social media, or it can rely on its holiday connections to drive engagement with more mature audiences.
With a cost basis on shares of Coca-Cola of about $3.25 per share, Berkshire Hathaway is collecting a jaw-dropping 54% annual yield on cost. In short, Buffett and his team are more than doubling their initial investment in Coca-Cola every two years solely from the dividend.
