Would you like a portfolio that can generate enough passive income to allow for a comfortable retirement? I'll let you in on a very poorly kept secret that could help you get there. Many of the world's most successful investors manage institutions that must disclose their trading activity four times a year.
Riding the coattails of successful investors isn't a great way to gain notoriety, but it could give your portfolio a boost. Warren Buffett and the holding company he's managed since the 1960s, Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%), recently disclosed some heavy investments into dividend-paying stocks during the third quarter of 2022.
Image source: The Motley Fool.
Finding companies that can reliably deliver a portion of profits that grow over time is how Buffett transformed Berkshire Hathaway from a struggling textile business into a holding company currently worth around $680 billion. Here's how the new additions to his portfolio could pay off down the road.
Taiwan Semiconductor
As its name implies, Taiwan Semiconductor Manufacturing (TSM -3.45%), or TSMC, manufactures a lot of computer chips. In fact, it's arguably the largest chipmaker on the planet right now.
Buffett felt comfortable buying more than 60 million shares of TSMC partly because it's a key supplier for Apple. The smartphone behemoth has been one of Berkshire's best-performing investments and it currently makes up more than two-fifths of its entire portfolio.
Buffett also knows that TSMC is one of just a few companies that can churn out 5-nanometer and 7-nanometer chips at scale. By the end of 2022, the company expects to begin mass-producing even smaller chips that will strengthen its already competitive position.
Taiwan Semiconductor doesn't feel obligated to raise its dividend payout annually the way most U.S. companies do. While it doesn't rise regularly, the company hasn't had to reduce its dividend since switching to all-cash payments in 2009.
At recent prices, the stock offers a nice 2.3% yield that Buffett and Berkshire expect to grow, albeit at an unpredictable pace. Buffett famously likes to buy cyclical stocks when business is relatively slow and then hold on through one long recovery period after another.
Occidental Petroleum
Occidental Petroleum (OXY 0.89%) is another company that doesn't make investors guess what it does for a living. In addition to a large oil and gas production business, Occidental has a chemicals business that generated around 15% of pre-tax profits in the third quarter.
Occidental slashed its payout in 2020 after the COVID-19 pandemic sent oil prices careening off a cliff. Instead of a swift return to big dividend payouts now that oil prices have recovered, the company has been returning cash to investors in the form of buybacks that lowered its outstanding share count by 2.7% this year. The company is also on pace to repay around $10 billion in debt this year if oil prices continue to cooperate.
Shares of Occidental Petroleum offer a minuscule 0.7% dividend yield at recent prices. Buffett bought over 35 million of those shares in the third quarter most likely expecting it to rise dramatically. The company generated a whopping $12.1 billion in free cash flow over the past year and used less than 9% to meet its dividend obligation. With fewer shares to distribute to, and a war in Ukraine keeping oil prices elevated, this payout could soar over the next couple of years.
How to choose?
If you're prepared to hang on to your stocks for the long run, like Buffett does, adding any one of these stocks to your portfolio right now looks like a smart move. That said, investors should understand that TSMC is a lot riskier than Occidental Petroleum. The chipmaker's shares have been trading at 24.1 times free cash flow, while shares of Occidental are trading at the unimaginably low price of just 6 times free cash flow.
Demand for semiconductors is rising a lot faster than the consumption of fossil fuels. That said, shares of Occidental are trading at such a low valuation that the stock can provide satisfying returns even if profits completely stagnate. If you do choose one of these stocks, just make sure that it's a relatively small part of a diversified portfolio.
