You can safely say that Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett knows a thing or two about investing on Wall Street. Since he became CEO in 1965, he's overseen a greater than 4,100,000% increase in Berkshire's Class A shares (BRK.A). On an annualized basis, he's doubled up the total return, including dividends, of the broad-based S&P 500 over a stretch of nearly six decades.
What's phenomenal about the Oracle of Omaha's investment strategy is that it can be duplicated by everyday investors. Buffett willingly shares his investment methodology, which often involves seeking out great businesses at fair prices and holding them for long periods of time.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But one of the top reasons Berkshire Hathaway has been such a success for investors is Buffett's love of dividend stocks. Income stocks tend to be profitable on a recurring basis, offer transparent long-term growth outlooks, and have an extensive history of vastly outperforming stocks that don't offer a dividend over multidecade timelines.
Over the next 12 months, Warren Buffett's company is on pace to collect north of $6 billion in dividend income. The kicker is that $5.17 billion of this annual dividend income will come from just seven stocks.
1. Occidental Petroleum: $959,833,478 in annual dividend income (includes preferred stock dividends)
Among the roughly four dozen securities currently held in Berkshire Hathaway's investment portfolio, it's energy stock Occidental Petroleum (OXY -0.15%) that's generating the most dividend income. Buffett's company is expected to rake in close to $160 million in common stock dividends on the nearly 222 million shares of Occidental it owns. Additionally, Berkshire owns $10 billion worth of Occidental Petroleum preferred stock that yields 8% annually, which is where the remaining $800 million in dividend income originates.
Since the start of 2022, Buffett and his investing lieutenants, Todd Combs and Ted Weschler, have been aggressively buying shares of Occidental. In all likelihood, this signals that Buffett, Combs, and Weschler expect energy commodity prices to remain above their historic average for some time. With Russia invading Ukraine and global energy majors paring back their capital expenditures for years during the pandemic, a tight global supply for oil could certainly buoy spot prices.
Despite being an integrated operator, Occidental generates the lion's share of its revenue from drilling. This means a higher spot price for crude oil will have a materially larger impact on its operating cash flow when compared to most oil stocks.
A rapid rise in the federal funds rate has substantially increased Bank of America's net-interest income. Effective Federal Funds Rate data by YCharts.
2. Bank of America: $908,909,765 in annual dividend income
Another big-time income stock in the Oracle of Omaha's portfolio is money-center giant Bank of America (BAC -0.21%). Berkshire stands to collect almost $909 million in annual dividend income from one of America's biggest banks.
What makes bank stocks such a smart investment for patient investors is their cyclical ties. Though inevitable recessions will take their toll on banks, the U.S. economy spends a considerably longer amount of time expanding than contracting. This allows companies like Bank of America to steadily grow their loans and deposits over time. Loan and deposit growth is the bread-and-butter that allows banks to generate income and return capital to shareholders.
But I'd be remiss if I didn't also note that Bank of America has a leg up on its competition in the current environment. As the most interest-sensitive of the money-center banks, the current rate-hiking cycle -- a 500-basis-point increase in a little over a year by the nation's central bank -- is a boon to BofA's net-interest income, and therefore its bottom line.
3. Apple: $878,937,967 in annual dividend income
According to Warren Buffett, tech stock Apple (AAPL -0.35%) is "a better business than any we own." This helps explain why Apple comprises 47.5% of Berkshire Hathaway's $349 billion of invested assets, as well as why Buffett's company is on track to collect close to $879 million in annual dividend income from the United States' largest publicly traded company by market cap.
Aside from having a well-known brand and a highly loyal customer base, what Buffett can appreciate most about Apple is its management team. CEO Tim Cook continues to lead with innovation. Apple's iPhone still dominates the domestic smartphone market, and the company's subscription services segment has rapidly expanded. Services should help minimize the sales fluctuations often seen during Apple's physical product replacement cycles.
Further, the Oracle of Omaha is a big fan of Apple's capital-return program. Since the start of 2013, Apple has repurchased in the neighborhood of $586 billion worth of its common stock.
A sizable uptick in the spot price of crude oil has allowed Chevron to pare down its net debt. WTI Crude Oil Spot Price data by YCharts.
4. Chevron: $799,741,874 in annual dividend income
Even after Buffett and his lieutenants pared down their company's stake in energy stock Chevron (CVX 0.37%) during the first quarter, this oil and gas juggernaut is still on pace to provide Berkshire Hathaway with almost $800 million in annual dividend income.
Though the investment thesis for Chevron more or less mirrors Occidental Petroleum, there are a few key differences between these two integrated energy giants. For one, Chevron generates a significant percentage of its revenue from its transmission pipelines, chemical plants, and refineries. In other words, it's better hedged than Occidental in the event crude oil prices decline.
The other differentiating factor can be seen on the balance sheets of both companies. Among global energy majors, Chevron might have the most flexible balance sheet of all. Management wisely paid down debt in 2022, which is what allowed Chevron's board of directors to authorize an up to $75 billion share repurchase program. Meanwhile, Occidental is still working its way out of a sizable net-debt situation following its acquisition of Anadarko in 2019.
Image source: Coca-Cola.
5. Coca-Cola: $736,000,000 in annual dividend income
Beverage stock Coca-Cola (KO) is Berkshire Hathaway's longest continuous holding (35 years). It's also a company responsible for padding Warren Buffett's pockets. Coke has increased its base annual payout for 61 consecutive years, and Buffett's company is expected to collect $736 million in dividend income over the coming year.
Coca-Cola's recipe for ongoing success is a combination of geographic diversity and stellar marketing. In terms of the former, Coca-Cola has 26 separate brands generating at least $1 billion in annual sales, and it's operating in all but three countries worldwide. This allows it to generate predictable sales and cash flow in developed countries, while moving the organic growth needle in faster-growing emerging markets.
As for marketing, it certainly doesn't hurt that Coca-Cola is one of the best-known consumer staples brands on the planet. It's spending more than half of its marketing budget on digital ads catered to a younger generation of consumers. However, it has the brand ambassadors and holiday affiliations that also help it easily connect with older consumers.
6. Kraft Heinz: $521,015,709 in annual dividend income
Prepackaged foods and condiments company Kraft Heinz (KHC -0.55%) is another top-notch income stock for Berkshire Hathaway. Despite Kraft Heinz reducing its quarterly payout four years ago, it's still responsible for approximately $521 million in annual dividend income for Buffett's company.
Although most companies took it on the chin during the COVID-19 pandemic, Kraft Heinz found itself in the right place at the right time. With people choosing to eat out less, the company's easy-to-prepare meals and snacks flew off grocery store shelves. With the company owning well over a dozen brand-name food, snack, and condiment brands, it's also had little trouble raising the price of its products.
However, Kraft Heinz has arguably been one of Buffett's most disappointing investments. The company's balance sheet is bogged down by goodwill and a sizable net-debt position. Further, volume has declined in each of the past two quarters, which may signal that value-conscious consumers are trading down to cheaper store brands.
7. American Express: $363,865,680 in annual dividend income
Last, but certainly not least, is credit-services provider American Express (AXP -0.62%). AmEx, as it's more commonly known, has been a continuous holding by Berkshire Hathaway since 1993. Following a fairly recent payout increase, AmEx is on track to provide Buffett's company with almost $364 million in dividend income over the next year.
One reason American Express has been a winning investment is its focus on high earners. AmEx has always been able to attract individuals with high earnings and/or a high net worth. High earners are less likely to change their spending habits when the inflation rate picks up or the U.S./global economy enters a mild recession. It effectively means AmEx is better protected from credit delinquencies than some of its peers.
Additionally, American Express benefits from both sides of a transaction. As of 2021, it was the No. 3 payment processor by credit card network purchase volume in the U.S. (the No. 1 market for consumption globally). On top of collecting merchant fees, it acts as a lender and generates annual cardholder fees and/or net-interest income.
