If you’ve ever wondered why professional and everyday investors pay such close attention to what stocks Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett is buying and selling, look no further than his track record. Since taking over as CEO in the mid-1960s, he’s presided over an aggregate return in his company’s Class A shares of almost 5,470,000%, as of the closing bell on Sept. 12.
The Oracle of Omaha’s “recipe” for success has involved buying time-tested businesses with sustainable competitive advantages and hanging onto these investments for extended periods. Core holdings Coca-Cola and American Express, which Buffett’s company has owned since 1988 and 1991, respectively, are perfect examples of brand-name businesses with sustainable moats.
However, dividend stocks have played an equally important role in Buffett’s long-term success. Companies that regularly share a percentage of their profits with investors tend to be profitable on a recurring basis and time-tested.
More importantly, dividend stocks have demonstrably outperformed non-payers over the last half-century. In The Power of Dividends: Past, Present, and Future, the investment advisors at Hartford Funds note that dividend stocks more than doubled up the average annual return of non-payers over the last 50 years (1973-2023): 9.17% vs. 4.27%.
Based on Berkshire Hathaway’s existing portfolio, Buffett and his investment team should oversee the collection of well over $5 billion in dividend income over the next 12 months. But most of this dividend income can be traced back to just a few top holdings.
Although Bank of America (BAC) had been Buffett’s top dividend stock, his recent selling activity in the money-center bank has allowed another income stock to take this honor.
Move over, Bank of America: You’re no longer Warren Buffett’s top dividend stock
On July 24, roughly four weeks after the latest round of annual stress tests by the Federal Reserve were published, Bank of America’s board announced plans to increase its quarterly payout by 8% to $0.26 per share, as well as return as much as $25 billion to its shareholders via buybacks. With Berkshire entering the third quarter with more than 1.03 billion shares of BofA in its portfolio, this position alone would have delivered north of $1.07 billion in dividend income over the coming 12 months.
But on July 17, the Oracle of Omaha began hitting the brakes on Bank of America stock and pretty much hasn’t stopped since then. Between July 17 and Sept. 10, a span of 39 trading days, Buffett has been a seller of BofA stock in 27 of these sessions. All told, Berkshire’s stake in Buffett’s once-favorite bank stock has been reduced by close to 174 million shares, as of this writing.
One possible reason behind this selling is Buffett’s desire to lock in gains ahead of an expected rate-easing cycle by the nation’s central bank. No money-center bank is more interest-sensitive than Bank of America. When interest rates decline, its net interest income will feel the pinch more than other large banks.
Buffett might also be selling for tax purposes. He proclaimed during Berkshire Hathaway’s annual shareholder meeting in early May that it’s likely corporate tax rates head higher. Thus, locking in sizable unrealized gains now will, in hindsight, be a smart move.
It’s also possible the Oracle of Omaha simply wants little to do with a historically pricey stock market.
Regardless of the reasons behind his active selling in BofA stock, Berkshire Hathaway still held 858,180,506 shares, as of the closing bell on Sept. 10. With Bank of America doling out a base annual payout of $1.04 per share, this stake would yield a hearty $892,507,726 in dividend income over the next 12 months, assuming no more selling activity.
But $892.5 million isn’t good enough to take the top spot among dividend stocks in Warren Buffett’s portfolio.
The Oracle of Omaha’s top dividend stock will generate almost $904 million each year
The latest round of selling in BofA has vaulted one of Buffett’s favorite stocks to buy over the last two-plus years, energy juggernaut Occidental Petroleum (OXY), on to the pedestal in terms of dividend income.
Since 2022 began, Berkshire’s brightest minds have purchased 255,281,524 shares of oil and gas stock Occidental. With Occidental dishing out a $0.22-per-share dividend each quarter, Buffett’s common stock position is expected to generate $224,647,741 in dividend income over the next 12 months.
However, Buffett’s company also holds $8.489 billion in Occidental Petroleum preferred stock that yields 8% annually. This works out to an additional $679,120,000 that, in combination with the income received from Berkshire’s common-stock stake in Occidental, increases the 12-month dividend “haul” to $903,767,741!
One of the primary reasons Buffett can’t stop buying shares of Occidental Petroleum is the belief that the spot price of oil will remain elevated or head even higher. In addition to being an in-demand global resource, the supply of crude oil has been constrained by Russia’s invasion of Ukraine and multiple years of reduced capital spending by global energy majors during the COVID-19 pandemic. When the supply of a key commodity is tight, it’s not uncommon for its price to receive a boost.
Although a higher spot price for crude oil helps all drillers, it’s an outsized positive for Occidental, which generates the lion’s share of its revenue from its upstream drilling operations. If the price of oil rises, Occidental enjoys a greater increase to its operating cash flow than other integrated energy companies. Just be warned that the opposite holds true, too. If the spot price of crude oil declines, Occidental’s operating cash flow can take it on the chin more than other integrated oil and gas operators.
Furthermore, Berkshire Hathaway holds warrants to 83,858,848.81 common shares of Occidental stock that can be exercised at $59.624 per share. It’s in Buffett’s and Berkshire’s best interest that Occidental’s share price remains above this exercise price.
In mid-2017, the Oracle of Omaha exercised warrants to purchase 700 million shares of BofA at just $7.14 per share. When executed, Bank of America’s stock was trading in the neighborhood of $24 per share, which led to a sizable gain for Buffett and his company. He’d love for a repeat of this success with Occidental.
But even if these warrants aren’t exercised, it doesn’t change the fact that Occidental Petroleum is now Warren Buffett’s top dividend stock.
— Sean Williams
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Source: The Motley Fool