Warren Buffett's track record as an investor over the decades is so strong that he's often considered to be the most popular investor of all time. Sample this: Between 1964 and 2022, Class A shares of his company Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) generated a total return of 3,787,464%. The S&P 500, meanwhile, gained 24,708% during the period, including dividends.
Buffett owns many stocks through Berkshire, which is why beginner and seasoned investors alike often track his portfolio, especially his largest holdings. Although Apple alone constitutes almost 46% of Buffett's $372 billion portfolio, the bulk of the remaining investment is in 7 stocks, with each constituting 2% or more of his portfolio. Of these, only two oil stocks made the list, and combined, they make up 9% of his holdings.
He typically invests in stable, boring businesses, and the oil and gas industry is anything but stable given the volatility in commodity prices. Back in 2020, Buffett even admitted that an investment in an oil production company is merely an "investment that depends on the price of oil."
The sector is an offbeat investment for him, but there's a reason he chose two particular oil and gas stocks to pump billions of dollars into.
Warren Buffett. Image source: The Motley Fool.
A top-notch dividend growth stock
Chevron (CVX 0.37%) is one of the largest integrated energy companies in the world, and the second-largest energy company in the U.S. in terms of market capitalization. Buffett and his team first bought shares of Chevron in the third quarter of 2020 amid the stock's sell-off. Although they have trimmed their position in recent months, Chevron is still the fifth-largest holding in Berkshire's portfolio, at 5.5%.
Buffett loves financially strong companies with consistently growing cash flows and return on capital. And 2022 was a banner year for Chevron, with its earnings and cash flow hitting all-time highs, driven by record U.S. oil production. Chevron's return on capital employed of 20.3% last year was also its highest since 2011.
Buffett loves a consistent dividend policy, and several of the stocks he owns have been growing their dividends for years now. Chevron increased its dividend for the 36th straight year in early 2023. Its dividend growth in the past five years has also outpaced that of rival ExxonMobil (XOM -2.78%), the only other oil stock with a streak of consecutive annual dividend increases that is longer than 25 years.
Strong financials, regular and growing dividends, and a target to grow free cash flow at an average annual rate of 10% or more through 2027 are some of the reasons Chevron stock could remain a steady holding in Buffett's portfolio.
This Buffett oil stock is hugely diversified
If there's one stock that Buffett has been buying hand over fist in recent months, it's Occidental Petroleum (OXY -0.15%). He already owned warrants and preferred stock in Occidental before disclosing a position in its common stock in March last year. He has consistently bought Occidental shares since.
The latest filing from Berkshire Hathaway, as of this writing, shows that it bought another 2.1 million shares between June 26 and 28. Buffett now owns more than a 25% stake in Occidental, and the stock makes up 3.5% of his portfolio.
Although the company is one of the largest oil and gas producers in the U.S., it also operates a midstream and marketing segment that includes a low-carbon-ventures business focused on the carbon capture and sequestration (CCS) market. ExxonMobil estimates the CCS market to be worth $4 trillion by 2050.
Occidental also has a chemical subsidiary called OxyChem, an important cash generator that produces chemicals like chlorine and caustic soda that are used in several industries.
That makes Occidental one of the most diversified energy companies, and it's faring well: It earned record net income and a return on capital employed of 28% in 2022. Earlier this year, the company increased its dividend by 38%.
Last year, Berkshire received regulatory approval to buy a 50% stake in Occidental, fueling speculation that Buffett will eventually acquire the company. Although he ruled out that idea at Berkshire Hathaway's latest annual shareholder meeting, the stock looks like one that might have found an almost permanent place in his portfolio.
