Berkshire Hathaway’s Dividend Strategy Powers Strong Returns in 2023
Few, if any, Wall Street money managers have more confidence in the U.S. economy and the stock market than Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett. Known as the “Oracle of Omaha,” Buffett has achieved a staggering cumulative return of 6,325,426% for Berkshire’s Class A shares (BRK.A) since he took over as CEO six decades ago.
While Buffett’s company has consistently outperformed the leading stock indexes over the long term, its year-to-date performance is particularly impressive. As of the closing bell on April 17, Berkshire’s stock is up 15%, in stark contrast to the benchmark S&P 500, which has declined by 10.2% since the start of 2023.
Where to invest $1,000 right now? Our analyst team has identified what they believe are the 10 best stocks to buy at this moment. Continue »
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
The contrast becomes even clearer when examining Berkshire’s performance against the growth-focused Nasdaq Composite (NASDAQINDEX: ^IXIC), which has fallen by 15.7% year-to-date, officially entering bear market territory as of April 8, following its all-time closing high.
Buffett’s Key to Success: Dividend Stocks
Warren Buffett has navigated historical volatility on Wall Street with remarkable skill. His secret lies largely in his preference for dividend stocks.
Buffett seeks out businesses that boast strong management teams and defined competitive advantages. These companies are typically profitable and maintain long-standing capital-return programs, positioning Berkshire for substantial dividend income.
According to research from Hartford Funds in partnership with Ned Davis Research, dividend stocks have outperformed non-payers significantly over 51 years (1973-2024), delivering an annualized return of 9.2% compared to 4.31% for non-payers. This stability, combined with Buffett’s strategy of focusing on his best investment ideas, means Berkshire is projected to earn nearly $3.3 billion in dividend income over the next year from four key companies.
Occidental Petroleum: $933,463,774 in Dividend Income
In a shift from traditional dividends from financial stocks, Berkshire is set to receive the highest payments from integrated oil and gas leader Occidental Petroleum (NYSE: OXY). The company anticipates over $254 million in income from its nearly 265 million shares of Occidental stock. Additionally, Berkshire will benefit from an 8% yield of about $679.1 million on its $8.489 billion preferred stock in Occidental.
Although Occidental’s revenue largely stems from its upstream drilling, making it sensitive to fluctuations in crude oil prices, Buffett likely sees potential in the growing global demand for oil and the supply challenges due to years of capital underinvestment by major energy firms following the pandemic. Moreover, Occidental has some hedging capabilities, with pipeline assets and chemical plants providing steady cash flow when oil prices dip.
Coca-Cola: $816,000,000 in Dividend Income
Another strong contributor to Berkshire Hathaway’s dividend income is beverage giant Coca-Cola (NYSE: KO), which Buffett has held since 1988. The brand is expected to provide $816 million in dividend income over the next 12 months.
Coca-Cola’s consistency in generating cash flow, particularly in developed markets, allows for predictable operating results. With a presence in nearly every country except North Korea, Cuba, and Russia, the company boasts global reach.
The marketing acumen of Coca-Cola is exemplary, utilizing social media and AI to engage younger audiences while maintaining ties with its established consumer base. Owing to its status as a basic necessity product, Coca-Cola has successfully raised its dividend for 63 consecutive years. By leveraging a low-cost basis of under $3.25 per share, Berkshire benefits from an impressive annual yield of 63% relative to cost from Coca-Cola’s cumulative dividend of $2.04 per share.
Chevron: $811,296,053 in Dividend Income
Another stock poised to enhance Berkshire Hathaway’s dividend earnings is integrated energy major Chevron (NYSE: CVX). The company has shown resilience with its base annual payout, having increased its dividends for 38 consecutive years. Chevron is projected to contribute over $811 million to Buffett’s company within the next year, further solidifying the firm’s performance amidst the Nasdaq’s current downturn.
Chevron and Bank of America Shine with Financial Resilience
Chevron’s Diverse Revenue Sources and Strong Balance Sheet
Chevron has positioned itself as a robust player in the oil industry, generating substantial revenue not only from its drilling operations but also from its midstream assets, such as transmission pipelines, and downstream assets, which include chemical plants and refineries. This diverse revenue stream provides Chevron with a hedge against potential declines in crude oil and natural gas prices.
Furthermore, among large oil companies, Chevron boasts one of the most favorable balance sheets. The company’s net-debt ratio was just over 10% at the close of 2024, demonstrating its financial strength. Its ability to generate predictable operating cash flow enhances its financial flexibility, a quality many energy companies would find enviable.
Additionally, Chevron’s commitment to returning value to shareholders is evident in its share repurchase initiatives. In January 2023, the board authorized a $75 billion share buyback program. Businesses like Chevron, with stable or growing net incomes, use buybacks strategically to boost earnings per share, ultimately making themselves more attractive to investors.
Bank of America: A Dividend Powerhouse
Bank of America, often referred to as BofA, has become a dividend favorite for Warren Buffett, with projected dividend income exceeding $707 million over the next year for Berkshire Hathaway. This performance is indicative of the bank’s robust position within the financial sector, which generally benefits from cyclical economic trends.
Historically, recessions are brief events, lasting an average of about 10 months since World War II, while economic expansions can persist for approximately five years. This cycle allows banks to gradually build their loan portfolios, contributing to their long-term growth.
BofA has also been particularly responsive to shifts in interest rates, enjoying significant increases in interest income during the Federal Reserve’s most aggressive rate-hiking cycle from March 2022 to July 2023. Even as the Fed enters a rate-easing phase, BofA is well-positioned to capitalize on high-interest loan opportunities.
Currently, Bank of America trades only 3% above its book value, a figure that suggests it may be undervalued. Generally, banks are perceived as attractive investments when trading at or below their book value, making BofA an interesting option for investors.
Considerations Before Investing in Occidental Petroleum
As you consider investing in Occidental Petroleum, it’s worth noting the insights from the Motley Fool Stock Advisor analyst team, which has highlighted ten stocks they believe present better investment opportunities than Occidental. For instance, Netflix, recommended back in December 2004, turned a $1,000 investment into $524,747 by now, and Nvidia, recommended in April 2005, would have grown that investment to $622,041.
Such historical performance underscores the value of careful stock selection. The Motley Fool Stock Advisor has posted an impressive average return of 792%, significantly outpacing the S&P 500, which stands at 153%. To stay informed about the most promising investment options, consider joining the Stock Advisor service.
Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
