It's safe to say that Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett knows a thing or two about investing. In his 58 years at the helm, he's overseen a greater than 4,300,000% aggregate gain in Berkshire's Class A shares (BRK.A), as well as doubled up the annualized total return, including dividends, of the widely followed S&P 500.
Lengthy books have been written on the core philosophies the Oracle of Omaha lives by, which includes thinking long-term and buying into great businesses with sustained catalysts at a fair price.
But what doesn't receive nearly enough credit for Buffett's nearly six decades of investment success is his penchant for buying dividend stocks. Companies that pay a regular dividend to their shareholders are usually profitable and time-tested. What's more, income stocks have a history of running circles around public companies that don't offer a payout in the return department.
A majority of the stocks currently held by Berkshire Hathaway pay a dividend, with Buffett's company set to collect close to $6 billion in income over the coming 12 months.
But what's truly surprising is how much of this income will derive from a small number of holdings. Warren Buffett and his team are set to rake in nearly $3.5 billion in annual dividend income from just four stocks over the next year.
Bank of America: $991,537,926 in annual dividend income
Berkshire Hathaway's No. 2 holding by market value, Bank of America (NYSE: BAC), will be doing the heaviest lifting of all when it comes to providing dividend income. The more than 1.03 billion shares Buffett's company owns of BofA will translate into almost $992 million in dividend income over the next 12 months.
The lure of bank stocks for Buffett has always been their cyclical ties and the recurring need for financial services. Though banks are cyclical, and will therefore contend with higher delinquency rates and loan losses during recessions, periods of economic expansion last considerably longer than downturns. Rather than foolishly trying to time when these downturns will occur, Buffett has wisely positioned Berkshire Hathaway in high-quality financial stocks, like BofA, to take advantage of long-winded expansions.
But there's more to Berkshire's No. 2 holding than just macroeconomic factors. Bank of America is also the most interest rate-sensitive of America's largest banks by assets. When interest rates change, no bank is more impacted than BofA.
Since March 2022, the nation's central bank has increased the federal funds rate by 525 basis points, which is the fastest pace of rate hikes in more than four decades. Every rate hike is leading to billions of dollars in added net interest income each quarter.
As I've previously pointed out, BofA has done an admirable job of digitizing its platform. Online and mobile-based transactions are considerably cheaper than in-person interactions. As more of its customers utilize digital transactions, Bank of America will be able to consolidate some of its physical branches and lower its expenses.
Apple: $878,937,967 in annual dividend income
Perhaps it comes as no surprise that tech stock Apple (NASDAQ: AAPL) plays a key role in Berkshire Hathaway's dividend income collection. Apple accounted for 49% of the company's nearly $366 billion of invested assets as of the closing bell on Dec. 8, 2023, making it the biggest holding by a considerable amount in Buffett's portfolio.
The $15 billion Apple is doling out in dividends annually is a reflection of its top-notch branding, as well as its cutting-edge innovation.
According to Kantar's 2023 BrandZ Rankings, Apple is the world's most valuable brand. It has an exceptionally loyal customer base, along with phenomenal pricing power. Meanwhile, Interbrand has listed Apple as the world's "best brand" for 11 consecutive years.
Beyond brand value, Apple is riding high thanks to its innovation. It's been a leading provider of smartphones for more than a decade, and it's led the way with tablets via the iPad. Moreover, CEO Tim Cook is overseeing the steady transition of Apple into a platforms-focused company. A subscription-driven model will further enhance customer loyalty and meaningfully improve the company's operating margin over the long term.
I'd be remiss if I didn't also mention Apple's unsurpassed capital-return program. In addition to its massive nominal-dollar dividend, Apple has repurchased in excess of $600 billion worth of its common stock since the start of 2013. Buffett has always appreciated a rock-solid share-buyback program.
Occidental Petroleum: $843,396,739 in annual dividend income (including preferred stock dividends)
Berkshire Hathaway is expected to receive $164.2 million in dividend income from the nearly 228.1 million shares of Occidental common stock it owns. Every single share of common stock has been purchased since the start of 2022.
Buffett's company also holds $8.49 billion of preferred stock in Occidental yielding 8% that'll generate around $679.2 million in annual income. Berkshire originally held $10 billion in preferred stock tied to a 2019 deal that helped Occidental acquire Anadarko. However, Occidental has redeemed $1.51 billion of this preferred position, through Nov. 7.
What makes Occidental such an attractive investment to Buffett and his team is the expectation that the spot price of crude oil will remain above its historic average. Supporting this thesis is Russia's war with Ukraine, along with three years of capital underinvestment by energy companies caused by the COVID-19 pandemic. As long as crude oil supply remains tight, there's a good likelihood that the spot price of crude oil will stay elevated.
A higher spot price for crude oil is especially important for Occidental Petroleum. Although it's an integrated energy company, it generates the lion's share of its revenue from its drilling operations. This is to say that if the spot price of crude oil increases, Occidental's operating cash flow will benefit more than most other integrated oil and gas operators. Just keep in mind that the reciprocal would also be true -- a declining spot price for crude oil will disproportionately hurt Occidental's operating cash flow.
Coca-Cola: $736,000,000 in annual dividend income
The fourth stock that, collectively with Bank of America, Apple, and Occidental Petroleum, allows Buffett to rake in nearly $3.5 billion in annual dividend income is beverage stock Coca-Cola (NYSE: KO). Coca-Cola has raised its base annual payout for 61 consecutive years, and it's Berkshire's longest continuous holding (since 1988).
One reason Coke is such a phenomenal income producer is that it's a consumer staples stock. Regardless of how well or poorly the U.S. and global economy perform, consumers are going to need food and beverages. This creates a predictable demand floor for Coca-Cola each year.
Branding is another catalyst for Coca-Cola and its rock-solid payout. Coca-Cola has topped the annually released "Brand Footprint" report from Kantar as the most chosen brand for 10 years running, as of 2022. Coke has a well-recognized logo and its top-notch marketing efforts have helped it connect with young and mature audiences alike for decades.
Equally important, Coca-Cola brings virtually unmatched geographic diversity to the table. With the exception of North Korea, Cuba, and Russia (the latter of which is due to its aforementioned ongoing war with Ukraine), Coke is operating in every other country around the globe. It has 26 brands generating at least $1 billion in annual sales, and it's able to rely on emerging markets for a proverbial shot in the arm of organic growth.
Berkshire Hathaway's cost basis for its Coca-Cola shares is just $3.2475. Based on its $1.84-per-share annual payout, Buffett's company is netting almost a 57% yield on cost. Put another way, Coca-Cola's dividend income alone is more than doubling Berkshire's initial investment in the company every two years.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.