Warren Buffett Rakes in Nearly $2 Billion in Annual Dividend Income from Two Stocks, and You Won't Guess Which Ones ?

Key Points:

• Warren Buffett has been able to outperform Wall Street for almost six decades, thanks to a massive stream of passive income.

• Even though Apple and Bank of America are Berkshire Hathaway's largest holdings in terms of market value, they are not the top-income stocks in Buffett's portfolio.

• According to Buffett and his investing team, there are two income juggernauts that offer substantial opportunities for growth and income generation.

Berkshire Hathaway's anticipated yearly income of $6.14 billion is heavily dependent on only two major holdings from the same sector, accounting for 32% of the total income.

Over the past weekend, Warren Buffett, the CEO of Berkshire Hathaway, proved once again why he is a legendary figure in the investing world. Warren Buffett's track record as CEO of Berkshire Hathaway since the mid-1960s is nothing short of impressive. Over the years, his leadership has resulted in a tremendous return of 3,787,464% on the company's Class A shares (BRK.A), which is a remarkable feat in the investing world. This is 153 times the total return, including dividends, of the benchmark S&P 500 over the same period. It takes more than luck to outperform the S&P 500 by such a significant margin.

Buffett's approach to investing is multifaceted, but he is known to share his wealth-building strategies with investors. Some of the key catalysts for his success include adopting a long-term mindset towards investments, favoring cyclical businesses, concentrating Berkshire Hathaway's investment portfolio, and investing in brand-name companies with strong management teams. These strategies have undoubtedly played a crucial role in the success of Berkshire Hathaway.

As of now, the company's two core holdings in the same sector are expected to account for 32% of Berkshire Hathaway's anticipated annual income of $6.14 billion this year.

(Warren Buffett | Image Source: Inc. Magazine)

The often-overlooked power of dividend stocks in Berkshire Hathaway's portfolio

One of the reasons behind Warren Buffett's success in investing that doesn't get enough attention is his affinity for dividend stocks. These stocks usually come from time-tested and profitable companies with transparent growth outlooks.

In the case of Berkshire Hathaway, the majority of the around four dozen securities in its $335 billion investment portfolio pays a dividend. Based on calculations, the company is expected to earn almost $6.14 billion in dividend income this year. However, due to portfolio concentration, a small percentage of its holdings, specifically two stocks, are expected to contribute almost $2 billion of this dividend income.

Massive Dividend Income from Recent Purchases: Warren Buffett's Latest Buys Projected to Yield Nearly $2 Billion Annually

It is noteworthy that while Apple and Bank of America are the two largest holdings of Berkshire Hathaway, they are not the top dividend producers in the portfolio. Despite the fact that these stocks account for 53.6% of invested assets and are expected to generate around $878.9 million and $908.9 million in dividend income respectively this year, there are two other holdings that produce the even higher annual income.

Warren Buffett's portfolio has two top dividend producers: Chevron and Occidental Petroleum. These energy stocks have been dubbed the "ATMs" of his portfolio due to the significant dividend income they generate. Berkshire Hathaway has held Chevron as a continuous holding since the fourth quarter of 2020, while its stake in Occidental Petroleum has been steadily growing since the first quarter of 2022.

Chevron is expected to bring in about $1.01 billion in annual dividend income, including shares held by Buffett's secret portfolio, New England Asset Management. The company has a reputation for robust capital-return programs, and Chevron has increased its base annual dividend for 36 consecutive years.

On the other hand, Occidental Petroleum is expected to bring in $952.4 million in annual dividend income. Of the roughly 211.7 million shares of common stock owned by Berkshire, $152.4 million will be produced by these shares' annual payout. The remaining $800 million will come from a $10 billion preferred stock position yielding 8%, which Berkshire Hathaway has held since 2019. Occidental used this investment to help fund its acquisition of Anadarko.

Buffett's Team is Impressed by Chevron and Occidental Petroleum - Here's Why?

Berkshire Hathaway's portfolio has seen a significant shift in recent years, with energy stocks now representing the third-highest weighting by sector. Warren Buffett and his team are confident in their investments in Chevron and Occidental Petroleum, indicating a belief that energy commodity prices, particularly oil, will remain high. This confidence is driven by two macro catalysts.

Firstly, the ongoing war between Russia and Ukraine has no end in sight, putting European oil and gas supply needs into question and leading to potentially higher energy commodity prices. Secondly, global energy majors have reduced their capital investments for three years due to the COVID-19 pandemic, and making up for this lost investment will take time. This means that an environment where oil and gas supply is constrained could benefit energy stocks, making Chevron and Occidental appealing investments for Berkshire Hathaway.

An important aspect of Chevron and Occidental Petroleum's appeal to Warren Buffett and his team is their diversified business models. While their upstream drilling segments are the primary drivers of their operating margins, they also have downstream chemical businesses, and Chevron even operates refineries and transmission pipelines. This diversification offers a measure of protection against downward price swings in the oil and gas markets, as these additional operations can help offset any losses.

Another factor that makes energy stocks attractive to Buffett and his team is their improving financial positions. For example, Chevron has been able to significantly reduce its net debt from $25.7 billion at the end of 2021 to just $7.4 billion as of March 31, 2023, thanks to higher energy prices. Similarly, Occidental Petroleum's net long-term debt fell from $35.5 billion in March 2021 to $19.7 billion by the end of 2022. This improved financial flexibility gives both companies more leeway to engage in share buyback programs, which can boost shareholder value.

For Warren Buffett, these qualities - diversified business models and strong financial positions - make "big oil" stocks like Chevron and Occidental Petroleum appealing investment opportunities, particularly given their substantial dividend payouts.

How Viable is Investing $1,000 in Chevron at Present?

Recently, the financial experts shared their top 10 stock picks for investors, and Chevron didn't make the list. So, it might be worth considering their recommendations before investing in Chevron or any other stock.

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