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The Oracle of Omaha’s Investment Strategy
Warren Buffett, renowned CEO of Berkshire Hathaway, has captivated both professional and everyday investors with his remarkable investment track record. Since assuming leadership in the mid-1960s, Buffett has guided his company’s Class A shares to an astonishing aggregate return of nearly 5,470,000% as of September 12. His success can be attributed to a well-honed strategy of investing in time-tested businesses with sustainable competitive advantages and holding onto these investments for the long term. Iconic companies like Coca-Cola and American Express, which Berkshire has held since 1988 and 1991 respectively, exemplify this approach with their enduring brand strength and economic moats.
The Role of Dividend Stocks in Buffett’s Success
While Buffett’s strategy often focuses on long-term holdings, dividend stocks have been equally crucial to his investing success. Companies that consistently share profits with shareholders tend to be profitable and resilient over time. More importantly, dividend stocks have outperformed non-dividend payers over the last 50 years. According to “The Power of Dividends: Past, Present, and Future” by Hartford Funds, dividend stocks have more than doubled the average annual return of non-payers since 1973, achieving returns of 9.17% compared to 4.27%.
Based on the current Berkshire Hathaway portfolio, Buffett and his team are projected to collect over $5 billion in dividend income in the next 12 months. However, a significant portion of this income is concentrated in a few top holdings.
Transition in Top Dividend Stock: Bank of America Steps Aside
Recently, Bank of America, once Buffett’s leading dividend stock, has been surpassed due to his ongoing selling activity in the bank. On July 24, following the Federal Reserve’s annual stress tests, Bank of America announced an 8% increase in its quarterly dividend, along with plans for a $25 billion buyback. With Berkshire owning over a billion shares of Bank of America, this position alone would have generated over $1.07 billion in dividend income in the coming year.
However, beginning on July 17, Buffett started reducing his stake in Bank of America, selling shares on 27 out of 39 trading days up to September 10. As a result, Berkshire’s position in the bank has decreased by nearly 174 million shares. Possible motivations for this selling include locking in gains before a potential rate-easing cycle by the Federal Reserve, as Bank of America is highly sensitive to interest rate changes. Additionally, Buffett may be selling for tax purposes, anticipating higher corporate tax rates in the future. Despite this reduction, Berkshire still holds over 858 million shares, expected to yield $892.5 million in dividends over the next year.
Occidental Petroleum: Buffett’s New Top Dividend Stock
With Bank of America’s diminished role, Occidental Petroleum has emerged as Buffett’s leading dividend stock. Since 2022, Berkshire has acquired over 255 million shares of Occidental, an energy powerhouse. With Occidental’s quarterly dividend of $0.22 per share, Buffett’s stake is projected to generate $224.6 million in dividend income over the next year.
Moreover, Berkshire holds $8.489 billion in Occidental preferred stock, yielding 8% annually, contributing an additional $679.1 million in dividends. Altogether, these investments are expected to bring in $903.8 million in dividends over the next 12 months, making Occidental Buffett’s top dividend stock.
Buffett’s enthusiasm for Occidental Petroleum is driven by the expectation that oil prices will remain high or increase. Global oil supply has been constrained by geopolitical factors and reduced capital spending during the COVID-19 pandemic, supporting higher prices. This benefits Occidental, which derives a significant portion of its revenue from upstream drilling operations. However, it’s worth noting that a decline in oil prices could adversely affect Occidental’s cash flow more than other integrated energy companies.
Additionally, Berkshire holds warrants for over 83 million shares of Occidental stock, exercisable at $59.624 per share. It’s in Buffett’s interest for Occidental’s share price to remain above this threshold, reminiscent of his successful 2017 exercise of Bank of America warrants.
A Second Chance for Lucrative Opportunities
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*Stock Advisor returns as of 09/16/2024
