For nearly six decades as Berkshire Hathaway (BRK.A) (BRK.B) CEO, Warren Buffett has run circles around Wall Street. Through this past weekend, the Oracle of Omaha has led his company’s Class A shares (BRK.A) to an aggregate return of well over 3,800,000% since taking the reins.

While there is no shortage of lists extolling the strategies Buffett has used to vastly outperform the benchmark S&P 500, it’s his penchant for buying and holding dividend stocks that might be his biggest tailwind. A majority of the roughly four dozen securities held by Berkshire Hathaway pay a dividend — and dividend stocks have a rich history of crushing their non-paying peers in the return department.

What’s particularly interesting about Berkshire’s portfolio is that Buffett’s love for dividend stocks is coupled with his preference for portfolio concentration. Although the Oracle of Omaha’s company is on track to collect over $6 billion in dividend income this year, $4.84 billion in annual dividend income — take note, this figure includes assets held by Buffett’s secret portfolio — is set to come from just six stocks.

1. Chevron: $964,107,966 in annual dividend income
The proverbial “Dividend King” of Berkshire Hathaway’s portfolio is energy stock Chevron (CVX), which has been aggressively bought by the Oracle of Omaha and his team over the past two years. Chevron is riding is a 35-year streak of increasing its base annual payout. One more boost and Buffett’s company could be looking at a cool $1 billion in annual dividends.

Warren Buffett’s seemingly new-found love for energy stocks looks to be a bet that crude oil and natural gas prices will remain above their historic norms. For that to happen, disruptions to the energy supply chain would need to persist. Russia’s invasion of Ukraine, coupled with an underinvestment in drilling and exploration by global energy majors, should constrain the worldwide supply of energy commodities and provide some degree of upward lift on spot prices.

Buffett and his team are likely also a big fans of Chevron’s balance sheet. The first nine months of 2022 saw the oil and gas giant reduce its net debt by 68% to just $8.2 billion. Among global energy majors, Chevron arguably has the most financial flexibility.

2. Bank of America: $908,909,765 in annual dividend income
This likely won’t come as a surprise to anyone who follows Berkshire Hathaway’s buying and selling activity via 13F filings, but the Oracle of Omaha and his investment team love bank stocks. In particular, they’ve really piled into Bank of America (BAC), or BofA for short. Over the next 12 months, Berkshire Hathaway will collect almost $909 million in dividend income from BofA.

Buffett’s fascination with bank stocks has to do with their ability to take advantage of long-winded periods of economic expansion. As loans and deposits grow, so does the bottom line for most banks. In turn, this often leads to a growing dividend and hearty share buyback program. During bull markets, it’s not uncommon for Bank of America to return $20 billion to $25 billion annually to its shareholders in the form of dividends and share repurchases.

Another factor working in BofA’s favor is its interest rate sensitivity. As the Federal Reserve raises interest rates, no large bank will a see bigger positive impact to its net interest income than Bank of America.

3. Occidental Petroleum: $901,062,858 in annual dividend income (includes preferred stock dividends)
Have I mentioned that energy stocks have been on the radar? Last year, Buffett and his investing lieutenants (Todd Combs and Ted Weschler) oversaw the purchase of more than 194 million shares of Occidental Petroleum (OXY). While these common shares are netting Berkshire Hathaway $101 million in yearly dividend income, it’s the $10 billion invested in Occidental preferred stock yielding 8% which is providing the bulk of income from this company ($800 million annually).

While Occidental Petroleum’s catalysts are similar to Chevron, there are a few key differences. Even though both energy companies are integrated, and therefore have downstream assets they can rely on to hedge a decline in the price of crude oil, Occidental’s revenue is more heavily weighted to high-margin drilling than Chevron.

The other difference can be found on Occidental’s balance sheet. Normally, the Oracle of Omaha and his team avoid heavily indebted businesses. Even though Occidental has reduced its net debt by $15 billion since the end of March 2021, it’s still sitting on $20.5 billion in net debt. It’ll need oil prices to remain elevated to continue chipping away at its burdensome debt.

4. Apple: $842,008,404 in annual dividend income
Another big-time income producer that should come as absolutely no surprise to most investors is tech stock Apple (AAPL). Apple is Berkshire Hathaway’s largest holding by a considerable amount, and is on track to provide $842 million in dividend income this year.

According to Kantar and its global BrandZ ranking, Apple is the most-valuable brand in the world. In particular, Kantar highlights the company’s product innovation and differentiation to help explain why consumers love the brand. Since introducing 5G capable versions of its iPhone in late 2020, Apple has accounted for around 50% (plus or minus a few percentage points) of U.S. smartphone market share. It’s innovations like these that keep customers loyal to the brand and generate mountains of operating cash flow.

But Apple’s true lure, at least in the eyes of Warren Buffett, might just be its unsurpassed capital-return program. Aside from doling out one of the largest nominal-dollar dividends among publicly traded companies, Apple has repurchased $554 billion worth of its common stock in a span of 10 years. Buying back that much stock has provided a nice lift to Apple’s earnings per share.

5. Coca-Cola: $704,000,000 in annual dividend income
Warren Buffett and his team are also raking in a boatload of annual dividend income from beverage stock Coca-Cola (KO). Coke is Berkshire Hathaway’s longest-held stock (since 1988), and it’ll likely be increasing its base annual payout for the 61st consecutive year in 2023.

The biggest competitive edge working in Coca-Cola’s favor is its geographic diversity. It holds a 14% share of all commercial beverages in developed countries, which leads to strong pricing power and predictable cash flow. Meanwhile, Coke maintains a 6% share of all commercial beverages in emerging markets and is able to take advantage of higher organic growth rates in these regions. With the exception of North Korea, Cuba, and Russia, a Coca-Cola product is available for sale in every other country right now.

Additionally, Coca-Cola’s marketing has been on point for decades. Whether it’s using social media to connect with young adults or leaning on its holiday ties-ins to captivate a more mature audience, Coca-Cola is one of the few brands that can easily transcend generational gaps and engage with consumers.

6. Kraft Heinz: $521,015,709 in annual dividend income
The sixth company that’s allowing Warren Buffett to rake in a collective $4.84 billion in annual dividend income is consumer staples stock Kraft Heinz (KHC). The company behind such brands as Kraft, Heinz, Cool Whip, Kool-Aid, and Oscar Mayer, helps Berkshire Hathaway collect $521 million in yearly income.

On one hand, Kraft Heinz has been a prime beneficiary of the COVID-19 pandemic. With people choosing to eat at home more often, the company’s vast assortment of prepackaged meals, snacks, and condiments, have helped its pricing power. Since food is a basic necessity in any economic environment, cash flow for a consumer staples giant like Kraft Heinz tends to be relatively predictable.

However, Kraft Heinz is also one of Berkshire Hathaway’s riskiest (and possibly worst) investments. Kraft Heinz’s balance sheet is weighed down by debt and goodwill, which leaves it little flexibility to reignite interest in its brands. To boot, historically high inflation may encourage shoppers to trade down to less-costly brands. Although Kraft Heinz’s payout doesn’t look to be in trouble, it’s not a stock I’d want to own in 2023.

— Sean Williams

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