How Warren Buffett Makes $4 Billion a Year in Dividends

While practically everyone is familiar with Warren Buffett’s history as a value investor, fewer people know about the massive dividends his portfolio produces. From five of Berkshire Hathaway’s top holdings alone, the Oracle of Omaha manages to bring in over $4 billion per year. Below are Warren Buffett’s top five dividend-paying stocks.

Financial giant Bank of America (NYSE:BAC) is a top holding for Berkshire Hathaway and its leading dividend income producer. Over the next 12 months, the stock is expected to produce $908.9 million in dividends for Berkshire. The stock currently yields 2.51 percent for an annual payout of $0.88 per share. This includes a recent 5 percent increase of the quarterly dividend announced in June.

Bank of America has done an excellent job of raising its dividend in recent years, benefitting buy-and-hold investors like Buffett. Over the last five years, the company has raised its dividend at a CAGR of 11.87 percent. At the 10-year time horizon, that growth rate jumps to an incredible 35.59 percent.

As a financial stock, Bank of America is also positioned to benefit from rising Federal Reserve interest rates. The company’s portfolio of credit is highly sensitive to interest rates, meaning that it should fare extremely well as the Fed continues to raise its baseline rate to counter inflation. This suggests that Bank of America will continue to perform quite well for the rest of 2022 and likely into 2023.

Oil producer Chevron (NYSE:CVX) is only slightly behind Bank of America in terms of the dividends it provides to Berkshire Hathaway. In the coming 12 months, the stock should pay Buffett’s company about $904.1 million. Chevron’s yield stands at a very respectable 3.94 percent. This translates to an annual payout of $5.68 per share.

Despite its higher yield, Chevron’s dividend has not grown as rapidly as Bank of America’s. The payout has grown at a rate of 6.11 percent over the last five years and 5.28 percent over the last 10. While certainly not as explosive as Bank of America’s dividend growth, these numbers show that Chevron is steadily increasing its cash reward to its shareholders.

In large part, Chevron’s appeal comes from its end-to-end approach to the oil and gas market. Unlike many other manufacturers, the company explores, drills, transports and processes petroleum. As a result, Chevron has multiple opportunities to profit from higher oil and natural gas prices. Based on Buffett’s recent buying activity in the energy sector, he appears to believe that these prices will remain elevated for the foreseeable future.

Like Chevron, Occidental Petroleum (NYSE:OXY) could be a prime beneficiary of higher oil prices going forward. The common stock yields only 0.81 percent for an annual payout of $0.52 per share. Berkshire, however, owns preferred shares that yield an enormous 8 percent, making Occidental one of its top cash producers. Over the next 12 months, Berkshire’s combined stake in Occidental preferred and common stock should pay about $893.5 million.

Unlike Chevron, Occidental’s dividend has actually been shrinking over the past several years. The 5-year compounded growth rate for the company’s payout is -37.93 percent. It should be noted, however, that this negative dividend growth hasn’t impacted Buffett’s preferred shares.

What it lacks in dividends, Occidental has more than made up for in share price growth this year. To date, shares are up 122.15 percent in 2022. The median target price for Occidental is $71, 10.2 percent higher than the current price of $64.40. As a result, Occidental may still have some room to run this year if oil prices remain at their current levels.

At just over 40 percent of the Berkshire portfolio by value, tech giant Apple (NASDAQ:AAPL) is one of the most successful investments Buffett has ever made. The stock currently yields a very modest 0.60 percent for an annual payout of $0.92 per share. Due to the sheer size of Berkshire’s position in Apple, however, it is still among the top five income producers in the company’s portfolio. In the next year, Apple should produce about $838.4 million in cash for Berkshire.

At the moment, Apple is still in its growth phase. This means that it can produce better returns by investing the majority of its cash flow back into its business than by paying out dividends to shareholders.

The company’s dividend, however, has been rising steadily. Over the last five years, the payout has increased at a CAGR of 8.75 percent. As Apple matures and finds it beneficial to return more cash to shareholders, there’s a good chance that the dividend will grow at a very healthy rate.

Perhaps Buffett’s most famous long-term holding, Coca-Cola (NYSE:KO) is also a strong dividend producer. The beverage giant should generate about $704 million in cash for Berkshire over the coming year, adding to its already impressive performance for the company. Coca-Cola stock yields 2.77 percent and pays $1.77 per share. The company maintains a slow but steady growth rate for its dividend, having raised it at an average rate of 5.79 percent over the last 10 years.

In many ways, Coca-Cola is the ultimate Warren Buffett stock. The company has an economic moat produced by brand recognition and scale. It is well-managed and has historically produced a steady stream of free cash flow. When Buffett purchased his stake, the company was also trading well below its intrinsic value. As a result, holding Coca-Cola has been a consistently winning strategy for Buffett and Berkshire.

Coca-Cola is also a prime example of the power of dividend growth investing over long periods of time. Today, the stock yields over 50 percent of Berkshire’s original cost basis as a result of dividend increases over the years. By buying and holding stocks that steadily raise their dividends in each successive year, investors can eventually see massive returns on their initial investments.