Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has a way of captivating the attention of Wall Street and investors, and you don't have to look any further than his investment track record to figure out why. Since taking over as CEO in the mid-1960s, the Oracle of Omaha, as he's come to be known, has overseen a nearly 4,500,000% aggregate gain in his company's Class A shares (BRK.A).
Buffett's "recipe" for success is well documented. It includes buying stakes in profitable companies for the long-term, as well as focusing on businesses with sustainable competitive advantages and trusted management teams.
However, one of the "ingredients" to Berkshire Hathaway's success that doesn't receive enough credit is Buffett's love for dividend stocks. Companies that pay a regular dividend to their shareholders tend to be recurringly profitable, time-tested, and are capable of providing transparent long-term growth outlooks.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Most importantly, income stocks have a lengthy track record of outperformance. A recent study from the Hartford Funds, in collaboration with Ned Davis Research, found that dividend stocks delivered an annualized return of 9.18% over the past half century (1973-2022). This was more than double the annualized return for non-payers (3.95%) over the same timeline.
In 2024, Buffett's company is set to collect around $6 billion in dividend income (including preferred dividends). Interestingly enough, $4.65 billion of this total will be raked in from just six core holdings.
1. Bank of America: $991,537,926 in annual dividend income
Among the nearly 50 stocks currently held in Berkshire Hathaway's portfolio (not all of which pay dividends), Bank of America (BAC -0.21%) stands out as the top dog for Warren Buffett and his team when it comes to dividend income. The more than 1.03 billion shares of BofA stock held by Buffett's company will generate almost $992 million in annual income.
The Oracle of Omaha and his team really appreciate cyclical businesses, and bank stocks certainly fit the mold. Even though recessions are a perfectly normal part of the economic cycle, they're relatively short-lived. Instead of trying to time when recessions will occur, Buffett has packed his company's portfolio with time-tested winners like Bank of America that he knows can benefit from long-winded periods of expansion.
What's been particularly helpful for Bank of America of late is the Federal Reserve's hawkish monetary policy. Since March 2022, the Fed has increased its federal funds rate by 525 basis points. The steepest rate-hiking cycle in four decades is music to the ears of BofA, which is the most interest-sensitive of America's money-center banks. Higher interest rates have added billions of dollars in net interest income each quarter.
2. Apple: $878,937,967 in annual dividend income
Perhaps it's no surprise that Berkshire Hathaway's largest holding by a longshot -- Apple (AAPL -0.35%) accounted for 47% of Berkshire's $361 billion portfolio, as of Jan. 9 -- is one of its top dividend stocks. Apple's $0.96-per-share payout translates into nearly $879 million in annual income for Buffett's company.
During Berkshire's 2023 annual shareholder meeting, Buffett described Apple as "a better business than any we own." This statement reflects Apple's exceptionally strong branding, highly loyal customer base, and its ability to out-innovate its competition. More than 15 years after its introduction, the iPhone still accounts for more than half of all smartphone market share in the U.S.
However, Apple's innovation goes well beyond the physical products that made it famous (iPhone, Mac, and iPad). CEO Tim Cook is overseeing the ongoing evolution of Apple into a platforms' company. Focusing on subscription services should encourage consumers to stay within Apple's ecosystem of products and services, while also helping to soften the revenue fluctuations that are commonly observed during major iPhone replacement cycles.
An elevated spot price for crude oil is good news for Occidental Petroleum. WTI Crude Oil Spot Price data by YCharts.
3. Occidental Petroleum: $854,675,379 in annual dividend income (including preferred stock dividends)
The energy sector is often known for doling out robust dividends. Buffett is overseeing the collection of nearly $175.5 million in annual income from the 243.7 million shares of Occidental Petroleum (OXY -0.15%) common stock held, as well as $679.2 million from $8.49 billion in Occidental preferred stock that's yielding 8% on an annual basis.
The roughly $14 billion Warren Buffett and his team currently have invested in Occidental is a clear bet on the spot price for crude oil remaining elevated or moving higher. Even though Occidental is an integrated oil and gas company -- in addition to drilling, it operates chemical plants -- it generates the lion's share of its revenue from drilling. If the spot price of oil climbs, it'll enjoy an outsized benefit.
On the other hand, Occidental Petroleum's balance sheet is somewhat of an anomaly compared to most of Buffett's investments. This is to say that the Oracle of Omaha often avoids heavily indebted businesses. Despite Occidental slashing its net debt by nearly half since completing its acquisition of Anadarko, it's still lugging around $18.6 billion in net debt, as of Sept. 30. It'll need the spot price of crude oil to remain elevated to further improve its financial flexibility.
Image source: Coca-Cola.
4. Coca-Cola: $736,000,000 in annual dividend income
Another foundational dividend stock in Warren Buffett's portfolio at Berkshire Hathaway is beverage behemoth Coca-Cola (KO). Based on Berkshire's ultralow cost basis of $3.2475 per share for Coca-Cola, the Oracle of Omaha's company is netting a 57% annual yield (Coca-Cola's base annual dividend is $1.84 per share), relative to cost.
The most-valuable thing Coca-Cola brings to the table for investors is predictability. With the exception of Cuba, North Korea, and Russia, it has ongoing operations in every other country. This leads to predictable operating cash flow in developed markets, and can provide the company with a steady organic growth boost from emerging markets. All told, Coca-Cola has more than two dozen brands generating at least $1 billion in annual sales.
Branding and marketing are two identifiable keys to its success. According to Kantar's annual "Brand Footprint" report, Coke products have been chosen by consumers more than any other brand on the planet for 10 consecutive years (as of 2022). Aside from having a well-known brand, this is also a reflection of the company's top-tier marketing. Coke is utilizing digital channels and artificial intelligence (AI) to cater ads to younger audiences, while leaning on well-known brand ambassadors to remain connected with mature consumers.
5. Chevron: $665,899,666 in annual dividend income
Have I mentioned that energy stocks are known for potentially juicy dividends? Last year, Chevron (CVX 0.37%) increased its base annual payout for a 36th consecutive year, with its board also authorizing a share repurchase program of up to $75 billion. The more than 110 million shares of Chevron held by Berkshire entitle Buffett's company to almost $666 million in annual income.
Although the investment thesis with Chevron somewhat mirrors Occidental Petroleum, there are two distinct differences between these integrated energy companies. To start with, Chevron generates a sizable percentage of its sales from its downstream segment, which includes chemical plants and refineries. Being less reliant on drilling for revenue means Chevron is better hedged than Occidental in the event that the spot price of crude oil declines.
The other big difference between these two integrated operators is their balance sheets. Whereas Occidental is quite levered, Chevron has a net debt ratio of just 8.1%, as of Sept. 30. Among the major global energy companies, an argument can be made that Chevron's balance sheet offers the most financial flexibility.
6. Kraft Heinz: $521,015,709 in annual dividend income
The final Buffett stock that's generating more than $500 million in annual dividend income for Berkshire Hathaway is packaged foods and condiments company Kraft Heinz (KHC -0.55%). Despite reducing its quarterly payout by 36% in 2019, Kraft Heinz is still doling out around $521 million each year to the Oracle of Omaha's company.
The beauty of consumer staples stocks like Kraft Heinz is that they provide a basic need good. Though consumers might reduce their discretionary spending during recessions, food isn't something people can live without. Further, Kraft Heinz's assortment of well-known brands affords the company exceptional pricing power.
However, consumers are becoming more cost-conscious following a period of historically high inflation. Kraft Heinz has reported multiple quarters of declining volume/mix, which suggests consumers are trading down to cheaper store-branded goods as prices climb. Considering that the company has quite a bit of debt on its balance sheet, reigniting consumer interest in its brands could prove challenging.
