For the better part of six decades, Warren Buffett, the billionaire CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), has been dazzling Wall Street with his investing prowess. As of June 30, 2023, Berkshire's Class A shares (BRK.A) have climbed an aggregate of 4,184,390% since the Oracle of Omaha took the reins in the mid-1960s.
Buffett's secret to success is truly no secret at all. For decades, he's discussed how he qualifies his investments and laid out other intangible factors that may work into his investment process.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
However, one catalyst that doesn't get nearly enough credit for Berkshire Hathaway's phenomenal performance since the mid-1960s is Warren Buffett's love of dividend stocks. Companies that pay a regular dividend are almost always profitable on a recurring basis and have well-defined long-term growth outlooks.
Perhaps more importantly, income stocks have been significant long-term outperformers, when compared to stocks that don't offer a dividend. According to a study published in 2013 from J.P. Morgan Asset Management, a division of banking giant JPMorgan Chase, publicly traded companies that initiated and grew their payouts between 1972 and 2012 delivered an annualized return of 9.5%. By comparison, publicly traded companies not offering a dividend generated just a 1.6% annualized return over the same 40-year stretch.
Berkshire Hathaway's investment portfolio is packed with profitable, time-tested, dividend-paying stocks. In 2023 alone, Buffett and his team should oversee the collection of around $6 billion in dividend income.
But what you might not realize is that close to half of this dividend income -- approximately $2.75 billion -- will come from just three stocks.
Occidental Petroleum: $961,373,018 in annual dividend income (includes preferred stock dividends)
One of the more interesting aspects of Berkshire Hathaway's investment portfolio is that two of its three most-prolific income stocks have very modest yields. The first of the two being energy stock Occidental Petroleum (OXY -0.15%), which sports just a 1.3% yield.
Since the start of 2022, Warren Buffett and his investing lieutenants, Ted Weschler and Todd Combs, have overseen the purchase of more than 224 million shares of Occidental common stock. These shares are netting Berkshire $161,373,018 in annual dividend income.
However, Berkshire Hathaway also holds $10 billion worth of Occidental Petroleum preferred stock that yields 8% annually -- ergo, the extra $800 million in annual income. This $10 billion in preferred stock stems from capital Berkshire supplied to Occidental in 2019 to facilitate its acquisition of Anadarko.
The 25.1% stake Berkshire Hathaway has taken in Occidental Petroleum over the past 18 months is indicative of the belief that energy commodities, such as crude oil and natural gas, will tread water or (more than likely) rise over time. A couple of macro catalysts back up the idea that crude prices can remain elevated.
First, there's the ongoing war between Russia and Ukraine, which has thrown a pretty big monkey wrench into Europe's energy supply needs. There's also the COVID-19 pandemic. Even though the worst of the pandemic appears to be over, energy companies worldwide reduced their capital investments for the past three-plus years. This lack of investment in new drilling and infrastructure is likely to keep a tight lid on crude oil supply. That's usually a recipe for higher spot oil prices.
Although higher energy commodity prices would be good news for the entire oil and gas sector, it's particularly important for Occidental Petroleum. Despite being an integrated operator with downstream chemical plants, Occidental generates the bulk of its revenue from drilling. In other words, it's far more sensitive to swings in the spot price of crude oil than its peers. Since Occidental is still lugging around a sizable amount of debt tied to its Anadarko acquisition, higher oil prices are needed to generate the cash flow necessary to continue reducing its debt.
Bank of America: $908,909,765 in annual dividend income
The second most-important dividend stock in Warren Buffett's portfolio is Bank of America (BAC -0.21%), which is more commonly known as "BofA." The more than 1 billion shares of BofA held by Berkshire Hathaway nets Buffett's company close to $909 million in yearly dividend income.
Note, as of the time of this writing on July 2, 2023, Bank of America hadn't made an announcement regarding its dividend payout for the upcoming year. However, it had no trouble passing the recent Federal Reserve stress test, and a number of its peers have modestly raised their quarterly payouts. At worst, BofA should generate nearly $909 million for Berkshire Hathaway over the next 12 months.
Bank stocks are beneficiaries of a simple numbers game. Even though banks are cyclical, and therefore prone to weakness during recessions, the length of recessions is substantially shorter than expansions. Whereas every recession after World War II has lasted between two and 18 months, expansions are almost always measured in multiple years. Lengthy periods of growth are what allow banks like BofA to reap the rewards of loan growth.
Speaking of loans, Bank of America finds itself ideally positioned during the current rate-hiking cycle. Among big banks, none is more sensitive to changes in interest rates than BofA. With this rate-hiking cycle being among the steepest on record, it means Bank of America is generating billions of dollars in added net-interest income each quarter. Keep in mind that Fed Chair Jay Powell expects two additional rate hikes this year.
Another reason we're seeing Bank of America return plenty of capital to its shareholders is because of its wise investments in digitization. As of the March-ended quarter, BofA had 45 million active customers banking online or via mobile app. What's more, 51% of total sales were completed digitally, and 68 million more payments were sent via Zelle than with a check. This digital push is considerably cheaper than in-person interactions for Bank of America, and it's having a positive impact on its operating efficiency.
Image source: Apple.
Apple: $878,937,967 in annual dividend income
The third big-time dividend stock that collectively accounts for nearly half of the annual dividend income Warren Buffett oversees for Berkshire Hathaway is Apple (AAPL -0.35%).
As a result of its strong share-price performance, Apple sports a rather unimpressive 0.5% yield. But because the Oracle of Omaha has 47% of his company's invested assets tied up in Apple, the nearly 915.6 million shares owned equates to almost $879 million in yearly dividend income.
During Berkshire Hathaway's annual shareholder meeting in early May, Warren Buffett referred to Apple as "a better business than any we own." It's a strong statement that reflects Apple's phenomenal management, ongoing innovation, and its unrivaled capital-return program.
Apple's leadership often fails to receive the credit it's due for steering the ship. Since taking over as CEO in 2011, Tim Cook has maintained his company's dominance in U.S. smartphone market share, as well as helped Apple evolve as a platform's company. The steady growth in subscription services should help the company steadily improve its operating margin over time, as well as lessen the sales volatility experienced during major iPhone replacement cycles.
It's also a company that's allows its innovations to do the talking. For instance, there have been numerous evolutions of the iPhone to account for wireless infrastructure download-speed upgrades. Likewise, the recent unveiling of the Vision Pro, a spatial computer worn on a users' face, represents the next potential leap in Apple's product lineup.
But there's pretty much no question that the reason Warren Buffett loves Apple is the company's unsurpassed capital-return program. Even with just a 0.5% yield, Apple's nominal-dollar payout for dividends tops $15 billion. That's among the highest in the world.
Further, Apple has repurchased approximately $586 billion worth of its common stock over the last 10 years. The amount of money Apple has put to work buying back its stock is more than the current market cap of 492 out of the remaining 499 S&P 500 companies.
