For the past 58 years, Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett has been running circles around Wall Street. He’s overseen a greater-than 4,300,000% aggregate gain in his company’s class A shares (BRK.A), as of the closing bell on Aug. 18, 2023, and has doubled-up the broad-based S&P 500 (as of Dec. 31, 2022), based on annualized total return, since becoming CEO.

While there is a long list of factors responsible for Buffett’s overwhelming long-term success, his penchant for piling into dividend stocks has played an undeniably important role. Public companies that pay a regular dividend are almost always time-tested, have clear long-term growth outlooks, and most importantly are profitable on a recurring basis. In short, they’re businesses investors can often trust over long periods.

Based on Berkshire Hathaway’s most recent Form 13F filing, the Oracle of Omaha and his investment team will oversee the collection of more than $6 billion in dividend income over the next 12 months. Amazingly, though, $4.31 billion in annual-dividend income will derive from just five stocks.

Bank of America: $991,537,926 in annual-dividend income
The income “breadwinner” of Warren Buffett’s portfolio is none other than money-center juggernaut Bank of America (BAC), which is better known as BofA. Based on the more than 1.03 billion shares of BofA that Berkshire Hathaway owns, along with BofA’s recently raised payout, that equates to $0.96 annually, Buffett’s company will receive nearly $992 million in dividend income over the next 12 months.

Although bank stocks typically struggle during periods of economic uncertainty, Bank of America finds itself uniquely positioned to thrive in the current environment. That’s because no money-center bank is more sensitive to interest-rate movements than Bank of America. The steepest rate-hiking cycle from the Federal Reserve in decades is adding billions of dollars in net-interest income to BofA’s coffers each quarter. With core inflation still more than double the Fed’s long-term target, BofA looks to have plenty of time to take advantage of higher interest rates.

Additionally, Bank of America isn’t receiving enough credit for its technology investments. While BofA might be viewed as a banking dinosaur by some consumers, it’s observed a steady uptick in the number of households banking online or via its mobile app. More payments and loans being processed digitally should lead to even higher operating efficiency.

Occidental Petroleum: $961,373,018 in annual-dividend income (includes preferred stock dividends)
Another big-time income generator for Warren Buffett’s company is oil stock Occidental Petroleum (OXY 0.80%). The more than 224 million shares of Occidental common stock held by Berkshire Hathaway are set to bring in $161 million in annual income. Meanwhile, Berkshire also holds $10 billion worth of preferred stock in Occidental that yields 8% annually, which is where the additional $800 million in annual-dividend income comes from.

The biggest catalyst for Occidental Petroleum is the tight global supply of crude oil, which has been caused by a combination of pandemic-related underinvestment by energy majors and the ongoing war between Russia and Ukraine. Although Occidental is an integrated energy company, it produces most of its revenue from drilling. If the spot price of crude oil moves higher, it should benefit far more than its peers.

The other potential driver for Occidental is an improved balance sheet. It’s no secret that Occidental buried itself in debt when it acquired Anadarko in 2019. But since March 2021, it’s reduced its net debt by more than $15 billion. A steadily improving balance sheet could lead to multiple expansion.

Apple: $878,937,967 in annual-dividend income
Not surprisingly, Berkshire Hathaway’s largest holding plays a key role in its annual-dividend collection. With Apple (AAPL) doling out $0.96 annually to its shareholders, and Berkshire holding more than 915 million shares of Apple, Buffett’s company is set to collect almost $879 million annually from Wall Street’s largest publicly traded company.

Most investors appreciate Apple for its innovation. For instance, the company’s iPhone has dominated the domestic smartphone market for more than a decade. Since introducing a 5G-capable version in late 2020, iPhone has accounted for around half (if not more) of U.S. smartphone market share.

However, CEO Tim Cook is repositioning Apple to become a platforms’ company. High-margin subscription services should allow Apple to steadily grow its operating margin over time, as well as smooth out the revenue fluctuations often seen during iPhone upgrade cycles.

I’d be remiss if I didn’t also mention Apple’s stellar capital-return program. Since commencing its buyback program in 2013, Apple has repurchased around $600 billion worth of its common stock.

Chevron: $743,645,525 in annual-dividend income
Energy stocks tend to sport big payouts, and integrated oil and gas company Chevron (CVX) is no slouch. Chevron has increased its base-annual dividend for 36 consecutive years and is on pace to pay out $6.04/share over the next 12 months. Based on the 123 million-plus shares of Chevron owned by Berkshire, Buffett’s company is set to collect nearly $744 million in annual-dividend income.

Though Chevron and Occidental Petroleum are both integrated operators, Chevron provides far superior balance. The transmission pipelines it owns generate predictable operating cash flow, while its chemical plants and refineries offer a hedge against a lower crude oil spot price. In other words, if the price of crude oil were to fall, Chevron is going to hold up far better than Occidental Petroleum.

The other key advantage for Chevron is its balance sheet. Chevron closed out the June-ended quarter with $11.9 billion in net debt, which works out to a net-debt ratio of just 7%. Among large energy companies, Chevron has incredible financial flexibility, which can come in handy when it comes to outlaying capital for new projects and making advantageous acquisitions.

Coca-Cola: $736,000,000 in annual-dividend income
The fifth and final income powerhouse that’ll collectively allow Warren Buffett to bring in $4.31 billion in annual-dividend income is beverage stock Coca-Cola (KO). Coca-Cola has raised its base-annual payout for a jaw-dropping 61 consecutive years and is currently doling out $1.84 per dsshare. With Berkshire Hathaway owning 400 million shares of Coke, it means Buffett’s company is on pace to collect $736 million in annual-dividend income from the beverage behemoth.

While it’s true that Coca-Cola’s growth heyday has long since passed, the company continues to move the needle for its shareholders thanks to its predictable operating cash flow and top-tier marketing. With regard to the former, Coke has operations in all but three countries worldwide (Cuba, North Korea, and Russia). This allows it to collect predictable cash flow in developed markets, while taking advantage of faster organic growth rates in emerging markets.

As for its marketing, Coca-Cola is devoting more than half of its ad budget to digital-media channels. Relying on artificial intelligence (AI) to curate and tailor ads, while also leaning on well-known brand ambassadors, is helping the company engage with, and win over, a younger generation of consumers.

— Sean Williams

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Source: The Motley Fool