Warren Buffett, CEO of Berkshire Hathaway, is known for his ability to consistently outperform Wall Street.
He has overseen an astounding increase of 3,787,464% in the company’s Class A shares since taking over almost six decades ago, which far surpasses the benchmark S&P 500’s 24,708% return over the same period with dividends included.
One reason for his success is his preference for dividend-paying stocks, which he believes offer advantages such as recurring profitability, transparent long-term outlooks, and outperformance over non-paying peers in the long run.
Berkshire Hathaway’s current portfolio is expected to collect an annual dividend income of $6.14 billion in 2023 if it remains unchanged. However, nearly half of this income (47%) is expected to come from Chevron, the company’s third-largest holding.
Chevron’s consistent dividend payments, which have increased annually for 36 consecutive years, make it an attractive investment for Buffett and his team.
Additionally, its integrated operating model, with midstream and downstream assets providing a hedge against a decline in the spot price of oil, has further enhanced its appeal.
Chevron’s ability to reduce its net debt significantly and launch an up to $75 billion share repurchase program has further boosted its value.
While there are concerns about a possible mild recession later this year and its impact on crude oil demand and pricing, macroeconomic factors such as three years of capital underinvestment caused by the COVID-19 pandemic and Russia’s invasion of Ukraine suggest that crude oil prices may remain above their historic average.
This scenario would be favorable for Chevron and other companies in the energy sector, making them attractive investments for long-term investors like Warren Buffett.
To put it differently, Berkshire Hathaway’s investment in Occidental Petroleum, which yields the second-largest annual dividend payout in the portfolio, indicates the company’s bullish outlook on the future of oil and natural gas prices.
Occidental’s revenue comes primarily from drilling operations, which positions the company to benefit from higher income and cash flow if crude oil prices remain elevated.
Although Occidental’s balance sheet has been affected by its 2019 acquisition of Anadarko and a high level of debt, elevated energy commodity prices have helped the company to reduce its net debt. While Warren Buffett usually looks for companies with a strong balance sheet when making sizable investments, the substantial annual dividend income of over $952 million from Occidental is impressive.
The Bank of America is the third largest dividend stock held by Berkshire Hathaway, generating nearly $909 million in annual dividend income. This makes up 47% of the total $6.1 billion that Berkshire Hathaway will receive in annual dividend income.
Why Warren Buffett Believes in the Long-Term investment
Bank stocks are a favorite industry of Warren Buffett due to their cyclical nature, making them profitable during long periods of economic expansion. Bank of America benefits from loan and deposit growth as the U.S. economy expands.
Additionally, when interest rates are raised, banks with outstanding variable-rate loans benefit, and Bank of America is the most interest-sensitive money center bank.
The bank’s reported net interest yield during the first quarter of 2023 was 2.2%, generating $14.6 billion in net interest income. Furthermore, Bank of America is making strides in digital banking, which is cheaper for banks and improves their operating efficiency.
While the Fed’s projection of a mild recession may cloud the short-term capital-return potential of big bank stocks, Bank of America has a history of delivering for its shareholders through dividends and buybacks over the long term.
Warren Buffett, the CEO of Berkshire Hathaway, has a long-standing interest in the banking industry, and Bank of America is the second-largest holding by market value in the company’s portfolio.
Additionally, the company has made a sizeable investment in Occidental Petroleum, a company that is expected to benefit from high oil and natural gas prices in the future. Finally, Apple is the largest holding in Berkshire Hathaway’s portfolio, and the company has been a consistent performer in terms of generating shareholder value through dividends and share buybacks.
Overall, these three companies are expected to generate significant returns for Berkshire Hathaway, and their strong financial performance is a reflection of the company’s investment strategy.