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Even though Warren Buffett won't let Berkshire Hathaway ( NYSE:BRK-A )( NYSE:BRK-B ) pay a dividend, the Oracle of Omaha has no problem letting the companies he invests in pay dividends to him.
While Buffett doesn't go out of his way to buy dividend-paying stocks, the criteria he uses to select companies means he ends up owning a lot of them. By buying successful, profitable businesses with substantial competitive strengths and having managers capable of proficiently allocating capital, Berkshire Hathaway owns about two dozen dividend-paying stocks.
There are good reasons why you should buy income-generating stocks, too. First, data from the Hartford Funds shows that since 1960, reinvested dividends are responsible for an incredible 85% of the cumulative total return of the S&P 500 index.
Second, dividend stocks handily outperform non-payers by a wide margin. Going all the way back to 1930, stocks on the benchmark index that initiated a payout and then raised it have never had a losing decade. Even during the Great Depression and the so-called "lost decade" of the 2000's, income producers always generated a positive return. No other class of stocks can say the same.
By focusing on dividend growth stocks, or companies that regularly raise their payout over time, you can significantly juice your own portfolio's returns.
Key Points About This Article:
- Warren Buffett loves dividend-paying stocks and he owns about two dozen such companies.
- Bank of America ( BAC ) has long been Buffett's largest dividend holdings generating over $1 billion in income for the Oracle of Omaha. However, he sold off more than one-fifth of his stake in the bank, dethroning it in the process.
- Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “ 2 Legendary High-Yield Dividend Stocks “ now.
Top dog no more
Bank of America branch at night
Buffett receives about $6 billion in dividends annually from his $314 billion portfolio. Some 17% of that amount came from just one stock: Bank of America ( NYSE:BAC ). He began buying shares back in 2007 and built it up into a billion-share position. It was his second-most valuable stock behind Apple ( NASDAQ:AAPL ).
Even when Buffett began selling off his banking stocks last year, Bank of America maintained its position inside Berkshire Hathaway. But that all changed in the second quarter.
Over the course of the three-month period, Buffett began selling down his money-center position. He ended up selling about 15% of BAC stock, though he still had 883 million shares. At the time, Bank of America remained his biggest dividend holding and with the company announcing an 8% hike in its quarterly payout to $0.26 per share, Buffett would still receive nearly $1 billion in dividends.
Yet he didn't stop there. Throughout the third quarter, Buffett has continued selling BAC stock and his holdings have fallen to under 803 million shares. That means with a dividend of $1.04 per share, the Oracle will receive nearly $835 million in payments. Not too shabby, but no longer top dog.
Passing the torch
"Dividends" spelled out on wood blocks surrounded by coins and stacks of bills
While Buffett hasn't said why he sold Bank of America stock there are a number of reasons why he might have done so. He previously criticized U.S. bank managers for greedily lining their own pockets at the expense of their business and believes they can learn from their Japanese counterparts.
Buffett might have also sold down his stake for tax purposes. That is believed to be at least part of the reason he sold down his holdings in Apple. It could also be that with the Federal Reserve cutting interest rates, Bank of America will be hurt more than others during the current rate-easing cycle.
Whatever the reason, the money center will no longer be the stock that pays Buffett the most in dividends. That title now passes to Occidental Petroleum ( NYSE:OXY ), arguably his favorite oil stock.
A new dividend king ascends the throne
Beginning in 2022, Buffett began buying Occidental stock hand over fist. He now owns well over 255 million shares that are valued at $13 billion. The Permian Basin giant has moved up into sixth place in the portfolio.
Although Occidental's $0.84 per share dividend seemingly only would pay Buffett $214 million in dividends, the Oracle also owns warrants for almost 84 million shares of OXY stock. Worth $8.5 billion, they yield 8% annually, adding an additional $679 million in income. That is a total of $893 million worth of dividends.
Buffett got those preferred shares when Occidental wanted to buy Anadarko Petroleum in 2019 and gave the oil company a $10 billion loan. OXY is regularly buying back the preferred stock so the outstanding amount dwindles over time, but right now it is the company that writes the biggest dividend check to Buffett every year.
He has used that maneuver with warrants successfully in the past, and he may be looking to cash in big this time with Occidental Petroleum.
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