If you've ever wondered why so many investors pay close attention to what the Oracle of Omaha, Warren Buffett, is buying and selling, look no further than his performance as CEO of Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%). Since taking over in 1965, he's doubled the average annual total return of the benchmark S&P 500 (19.8% vs. 9.9%) and produced an aggregate return of 3,787,464% for the company's Class A shares (BRK.A). This is 153 times greater than the total aggregate return for the S&P 500, including dividends.
In other words, mirroring Warren Buffett's trading activity has been a moneymaking strategy for nearly six decades.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett's secret sauce to success is extensive, with long holding periods and portfolio concentration playing key roles. But one of the unsung heroes of Berkshire Hathaway's success that doesn't get nearly enough credit or attention is dividend stocks.
Companies that pay a regular dividend are typically time-tested and profitable on a recurring basis. It also doesn't hurt that income stocks have historically outperformed non-dividend payers by a significant amount.
In 2023, inclusive of common and preferred stock, as well as the largest holdings from Warren Buffett's secret portfolio, Berkshire Hathaway is on track to collect $6,137,691,721 in dividend income. However, just seven stocks will account for a whopping 87% of this dividend income.
1. Chevron: $1,010,816,777 in annual dividend income
Practically a sixth of the dividend income Warren Buffett's company is set to collect this year will come from energy stock Chevron (CVX 0.44%), which has increased its base annual payout for 36 consecutive years.
The reason the Oracle of Omaha and his investing lieutenants (Todd Combs and Ted Weschler) have piled into Chevron since late 2020 is likely the belief that energy commodity prices will remain high for the foreseeable future. Russia's invasion of Ukraine, coupled with more than three years of reduced capital investment caused by pandemic-related demand uncertainty, has created crude oil and natural gas supply-chain issues. A market where the oil and gas supply is tight is normally a recipe for elevated energy commodity spot prices.
The other lures include Chevron's balance sheet and capital-return program. Thanks to higher oil prices throughout much of 2022, Chevron reduced its net debt from $25.7 billion to just $5.4 billion, as well as announced an up to $75 billion share buyback.
Higher oil prices have lifted Occidental's operating cash flow and helped it pay down debt. WTI Crude Oil Spot Price data by YCharts.
2. Occidental Petroleum: $952,429,702 (including preferred stock dividends)
Staying within the energy sector, oil stock Occidental Petroleum (OXY -0.09%) is Berkshire Hathaway's second-biggest dividend payer. The more than 211 million shares of common stock held by Buffett's company are set to generate more than $152 million in dividend income this year. Additionally, Berkshire has $10 billion in preferred shares of Occidental Petroleum that yield 8% annually -- thus, the extra $800 million.
The buy thesis for Occidental is somewhat similar to Chevron, but there are two key differences. While a broken energy supply chain is a catalyst for higher energy commodity prices, a higher percentage of Occidental's revenue derives from its drilling operations than Chevron. This means Occidental is more heavily levered to the vacillations in the spot price of crude oil.
The other thing to note is Occidental's balance sheet is more burdened by debt, compared to Chevron. Although the company has nearly halved its net debt over the past two years, as well as reintroduced its share-repurchase program, there's more work to be done.
Rapidly rising interest rates are boosting BofA's net interest income. Effective Federal Funds Rate data by YCharts.
3. Bank of America: $908,909,765
There isn't an industry Warren Buffett is more confident or comfortable investing in than bank stocks. Money-center giant Bank of America (BAC -0.13%) is Berkshire Hathaway's second-largest holding by market value and is currently on pace to deliver close to $909 million in dividend income this year.
Buffett loves bank stocks because the industry is cyclical. The Oracle of Omaha and his investing lieutenants fully understand that recessions are a normal part of the economic cycle. Rather than trying to time these downturns, Buffett and his team have packed their company's portfolio with businesses like BofA that benefit from long-winded expansions and grow in lockstep with the U.S. and global economies.
Despite growing fears about the health of U.S. and European banks, Bank of America seems to have a solid foundation. As the most interest-rate sensitive U.S. money-center bank, BofA is benefiting more than any of its peers as the Fed hikes interest rates. Even if loan losses rise in the short run, the benefit of more net-interest income from higher interest rates can more than offset an increase in loan losses.
Image source: Apple.
4. Apple: $842,315,551
Tech-stock Apple (AAPL 1.27%) has been dubbed by the Oracle of Omaha as one of Berkshire Hathaway's "four giants." Apple is, by far, Berkshire Hathaway's largest holding by market value, and it's on course to dole out more than $842 million in dividend income to Buffett's company this year.
Apple's brand and innovation are what make it such a special company. It's been the most valuable global brand for 10 consecutive years, according to Interbrand, and has accounted for approximately half of all smartphone-market share in the U.S. since introducing a 5G-capable version of its popular iPhone during the fourth quarter of 2020.
The company is also shifting its focus to subscription services. These offer sustainable double-digit sales growth, high margins, and a way to offset any revenue fluctuations associated with physical product-replacement cycles.
However, Buffett's favorite thing about Apple is probably its capital-return program. Apple has one of the largest nominal-dollar dividends on the planet and has repurchased well over $550 billion worth of its common stock over the past decade.
5. Coca-Cola: $736,000,000
Even though beverage stock Coca-Cola (KO 1.50%) only ranks fifth among dividend payers in Buffett's portfolio, it's the perfect example of leaning on time as an ally. With a cost basis of $3.2475 per share of Coke and an annual payout of $1.84/share, Berkshire's yield on cost for its Coca-Cola stake is a jaw-dropping 56.7%!
The beauty of Coke's operating model is that it's predictable. Regardless of whether the U.S. and global economies are firing on all cylinders or struggling, Coca-Cola's sales and income don't change much.
That's due, in large part, to Coke having a presence in all but three countries worldwide (North Korea, Cuba, and Russia). Broad-based geographic diversity allows Coca-Cola to generate consistent cash flow in developed countries while leaning on faster organic growth potential in emerging/developing markets.
Similar to Apple, Coca-Cola's branding is on point. Arguably, it's the most recognized consumer goods brand in the world. Whether its marketing team is using social media or sporting events to connect with a younger generation or relying on its holiday-themed associations to engage with a more mature audience, Coca-Cola has a history of connecting with multiple generations of consumers.
6. Kraft Heinz: $521,015,709
Packaged foods and condiments provider Kraft Heinz (KHC 1.31%) pays a handsome dividend. Berkshire Hathaway is expected to collect more than $521 million from Kraft Heinz in 2023.
Whereas most businesses were adversely impacted by the COVID-19 pandemic, Kraft Heinz benefited from people staying home. The company's easy-to-make meals, snacks, and condiments were popular purchases.
Owning more than a dozen well-known food brands hasn't hurt, either. Kraft Heinz's strong pricing power has helped the company fight back against historically high inflation.
The concern for Kraft Heinz and its shareholders is that the company has quite a bit of long-term debt, goodwill, and intangible assets on its balance sheet. Without a lot of financial flexibility, maintaining the momentum Kraft Heinz enjoyed during the pandemic years could be virtually impossible.
7. American Express: $363,865,680
The seventh stock that collectively accounts for 87% of the $6.137 billion in dividend income that Warren Buffett's company is on pace to receive in 2023 is credit-services company American Express (AXP 0.07%). AmEx has been continuously held by Berkshire Hathaway for the past 30 years and sports an impressive yield on cost of more than 28%.
One of the keys to the long-term success of American Express is its ability to play both sides of the aisle. In addition to collecting a fee from merchants for processing transactions on its network, AmEx is a lender. This allows the company to bring in interest income and fee revenue from cardholders, along with payment-processing fees.
Among lenders, American Express has always had a knack for attracting a high-earning clientele. High-net-worth individuals and couples are less likely to alter their spending habits or fail to pay their bills during minor economic downturns. In other words, successfully attracting the top decile of earners can help AmEx better navigate inevitable downturns in the U.S. and global economies.
