For nearly six decades, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has been dazzling Wall Street and everyday investors with his investing prowess. Even with an occasional bad trade mixed in, the Oracle of Omaha has delivered an aggregate return of better than 4,300,000% for his company's Class A shares (BRK.A) spanning a little over 58 years.
What's great about Buffett's success is his willingness to share his investment philosophy. His "recipe" often involves buying brand-name companies with sustained moats and trusted management teams, and hanging on these stakes for the long haul.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But what's commonly overlooked about Buffett's investment portfolio is his focus on dividend stocks and portfolio concentration. Even though the Oracle of Omaha and his investing lieutenants are overseeing a $343 billion portfolio that has stakes in over 50 securities, just a handful of these businesses account for the bulk of Berkshire's invested assets -- as well as its dividend income.
Over the next year, Warren Buffett and his team are expected to oversee the collection of more than $6 billion in dividend income. However, nearly half of this amount ($2.83 billion) will come from just three stocks.
Bank of America: $991,537,926 in annual dividend income
The Berkshire Hathaway holding that's bringing home more proverbial bacon for Warren Buffett and his team than any other stock is Bank of America (BAC -0.21%), which is commonly referred to as "BofA." The more than 1 billion shares of BofA held by Buffett's company are expected to produce north of $991 million in dividend income over the coming 12 months.
There's, arguably, no industry the Oracle of Omaha is more knowledgeable about than banking. That's probably why Bank of America is Berkshire's second-largest holding by market cap.
What makes bank stocks so special in Buffett's eyes is their ability to use time to their advantage. Even though financial stocks are cyclical and therefore exposed to higher loan losses and credit delinquencies during recessions, economic downturns tend to be short-lived. By comparison, the U.S. economy tends to expand for multiple years at a time, if not a full decade. Banks like BofA are able to take advantage of these long-winded periods of expansion by growing their loan portfolios and asset management segments.
The factor that sets Bank of America apart from its peers is the company's interest rate sensitivity. Changes in interest rates will increase or lower BofA's net interest income more than any other large U.S. bank. With the Federal Reserve raising its federal funds rate at the fastest pace in four decades to tackle historically high inflation, Bank of America has been a prime beneficiary. This rate-hiking cycle has added billions in net interest income each quarter, and the Fed doesn't appear to be particularly close to lowering rates anytime soon.
Credit should also be given to Bank of America's technology investments. As of the end of September 2023, just shy of three-quarters of its customers were banking online or via mobile app. Digital transactions and online loan sales are considerably less costly for banks than in-person or phone-based interactions. As consumers shift more of their banking to digital channels, BofA has the luxury of consolidating some of its branches and reducing its expenses.
Occidental Petroleum: $964,196,739 in annual dividend income (includes preferred stock dividends)
A second Warren Buffett stock that's generating an absolute boatload of annual dividend income is energy stock Occidental Petroleum (OXY -0.15%). Based on the more than 228 million shares of Occidental common stock owned by Berkshire Hathaway, the company's $0.72 base annual payout equates to about $164.2 million in annual income.
However, Buffett's company also owns $10 billion worth of Occidental preferred stock that yields 8% annually. Berkshire received this preferred stock (along with warrants for common shares of Occidental) in exchange for handing over $10 billion that helped facilitate Occidental Petroleum's acquisition of Anadarko in 2019. Collectively, Berkshire is netting more than $964 million in annual income from Occidental.
The core catalyst for this sizable investment is the expectation that the spot price for crude oil will rise. Fueling this thesis is multiple years of capital underinvestment by energy majors during the COVID-19 pandemic. When coupled with Russia's invasion of Ukraine and the uncertainty this invasion creates for Europe's energy supply needs, there's a strong possibility of global crude oil supply constraints for years to come. Tight supply should provide an upward lift on the spot price of crude oil.
Despite being an integrated energy company that operates downstream chemical plants, Occidental derives most of its revenue from the drilling side of the equation. In other words, Occidental is something of a leveraged play among integrated operators, based on the spot price of crude oil. If the price rises, Occidental should disproportionately benefit relative to its peers. But if it declines, the opposite is true.
The other thing that's noteworthy about this investment is that Occidental is carrying around quite a bit of net debt (nearly $19.7 billion). The Oracle of Omaha typically invests in businesses that have pristine balance sheets and plenty of financial flexibility. That isn't the case with Occidental. It'll require a sustained high spot price for crude oil to continue reducing its outstanding debt.
Image source: Apple.
Apple: $878,937,967 in annual dividend income
The third Buffett stock that collectively, with Bank of America and Occidental Petroleum, accounts for nearly half of Berkshire Hathaway's annual dividend income is tech stock Apple (AAPL -0.35%).
By itself, Apple represents more than 47% of Berkshire's $343 billion in invested assets. Perhaps it's no surprise that the nearly 915.6 million shares of Apple owned by the Oracle of Omaha's company are yielding almost $879 million in annual dividend income. Given Apple's mammoth operating cash flow, there's a good chance its base annual payout will head even higher over time.
Apple's primary catalyst has long been its innovation. The advent of the iPhone has put Apple on the leading edge of smartphone innovation for more than a decade. Since introducing a 5G-capable version of the iPhone during the fourth quarter of 2020, Apple has maintained around half (if not more) of the U.S. smartphone market share.
The next step in Apple's evolution is its ongoing development as a platforms company. CEO Tim Cook is spearheading this transition that emphasizes subscription services. The benefit of a subscription-driven segment is consistent operating cash flow, a higher long-term operating margin, and eventually less revenue volatility associated with major iPhone upgrade cycles.
But the primary reason Warren Buffett is so infatuated with Apple, which he's referred to as "better business than any we own," might be its capital-return program. On top of having the second-largest nominal-dollar dividend in the U.S., behind only Microsoft, Apple has repurchased more than $600 billion worth of its common stock since kicking off its buyback program 10 years ago. These repurchases are steadily increasing Berkshire's stake in Apple over time.
