Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) CEO Warren Buffett is easily one of the greatest investing minds of our generation. He took $10,000 in seed capital in the 1950s and has transformed it into a net worth of $88 billion.
He’s also created more than $400 billion in value for Berkshire Hathaway’s shareholders, with an average annual return on the company’s stock of 20.3% since 1965. In aggregate, Buffett’s company has gained more than 2,700,000% in 55 years.
Dividend stocks have played a huge role in Warren Buffett’s financial success
There are a lot of things that have made Buffett successful over the years.
The ability to identify companies with competitive advantages and the patience to see his investment thesis play out over many years, if not decades, have been key. But the biggest long-term advantage has been Buffett’s affinity for dividend stocks.
When taken as a whole, dividend stocks are winners. A report released in 2013 by J.P. Morgan Asset Management compared the performance of publicly traded companies that initiated and grew their dividend over four decades (1972-2012) to public companies that didn’t pay a dividend to shareholders.
The results showed a night-and-day difference, with dividend-paying stocks averaging a 9.5% annual gain over four decades and stocks that didn’t pay dividends gaining only 1.6% on an annual basis over the same period.
The reason for this outperformance is pretty straightforward. Companies that pay a dividend are almost always profitable and typically have time-tested business models. A company isn’t going to continue sharing a percentage of its profit if it doesn’t have a clear outlook of what’s to come.
Buffett is going to reap the rewards of dividend income in 2021
Currently, Berkshire Hathaway’s portfolio is home to 49 securities, 31 of which pay a dividend. Even with the Oracle of Omaha reducing his company’s stake in a handful of key dividend players, such as Wells Fargo, and seeing General Motors suspend its payout, he’s still in line to collect a pretty penny in dividend income in 2021.
The following calculations are based on Berkshire Hathaway’s 13F filing in mid-November, and it’s pretty much a certainty that the company’s investment portfolio will be altered throughout the year. Still, Warren Buffett seems on track to collect $3,800,719,373.25 in dividend income this year.
The bulk of the $3.8 billion in dividend payouts Berkshire Hathaway is expected to receive will come from the following six companies:
- Apple (NASDAQ:AAPL): $791,070,204
- Bank of America (NYSE:BAC): $743,653,444
- Coca-Cola (NYSE:KO): $656,000,000
- Kraft Heinz (NASDAQ:KHC): $521,015,709
- American Express (NYSE:AXP): $260,770,404
- U.S. Bancorp (NYSE:USB): $251,311,662
Apple’s role as Buffett’s dividend kingpin should come as no surprise, considering that it makes up 46.2% of Berkshire Hathaway’s invested assets. Apple’s 0.6% yield might look unimpressive, but this is more a function of Apple’s share price going gangbusters in recent years than Apple failing to provide for its shareholders. In reality, Apple has one of the largest nominal payouts at close to $13.8 billion each year. It’s also aggressively repurchased its common stock. Buffett has always been a big fan of management teams that repurchase their own stock on the cheap.
The Oracle of Omaha is also a clear supporter of bank stocks, with Bank of America and U.S. Bancorp combining to deliver almost $1 billion in dividend income in 2021. Last year, Berkshire Hathaway received the OK from the Federal Reserve Bank of Richmond to exceed a 10% holding stake in Bank of America. It’s freely added to its position since getting that green light. Meanwhile, U.S. Bancorp has historically been at or near the top of the list among big banks in terms of return on assets. The early stages of an economic recovery usually steepen the yield curve, and that’s almost always good news for bank stocks.
You’ll also note that some of Berkshire Hathaway’s most tenured holdings are the company’s top dividend income providers. Coca-Cola has been a consistent holding since 1988, with American Express a portfolio fixture since 1993. Because Buffett has allowed his investment thesis to play out over time with both companies, Berkshire Hathaway’s yield on cost (i.e., annual dividend received relative to Berkshire’s initial cost basis) is north of 50% for Coca-Cola and just over 20% for American Express.
Even Buffett’s worst investment over the past decade, Kraft Heinz, is paying out a small fortune each year. Holding a 26.6% stake, Berkshire Hathaway is somewhat stuck in its position as Kraft Heinz attempts to orchestrate a turnaround and drum up interest in its core consumer-packaged brands.
Dividend stocks are the silent heroes behind Warren Buffett’s investing success.
— Sean Williams
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Source: The Motley Fool