Warren Buffett loves a good dividend stock. Berkshire Hathaway‘s portfolio is positioned to collect over $6.1 billion in dividends over the next year. But just three stocks make up nearly half of that massive sum of cash. This goes to show that when Buffett finds a good company paying a good dividend, he’s not afraid of doubling down on it (or more).
Investors may want to look at Buffett’s biggest dividend payers for potential ideas for their own dividend portfolio. Here they are.
Bank of America ($991,537,926)
Buffett will collect nearly $1 billion from Bank of America (BAC -0.96%) over the next year. Berkshire owns 1.03 billion shares of the bank stock, which he’s continued to add to in 2023. The stock has severely underperformed this year and currently trades around a 52-week low. But that may make it a buying opportunity for investors.
While the financial sector has struggled in the wake of the banking crisis earlier this year, Bank of America is in a worse position than many of its peers. Its balance sheet contains much more longer-duration bonds. That means it’s locked in lower interest rates from before the Federal Reserve started increasing the federal funds rate, and it needs to wait for those assets to mature. Meanwhile, it needs to pay higher interest rates to deposit holders.
As a result, Bank of America’s net interest income growth slowed to just 4% last quarter. Management expects net interest income to decline year over year in the fourth quarter on a fully tax-equivalent basis.
But, there’s good news for investors. This quarter should be the nadir of its net interest income levels. “The good news is we believe [net investment income] will likely trough around the fourth quarter level of $14 billion and begin to grow again in the middle of next year,” CFO Alastair Borthwick said during Bank of America’s third-quarter earnings call.
Bank of America stock now trades at a price to tangible book value of less than 1.2. That’s well below its biggest peers, making the stock look very attractive. At today’s price, the stock will yield about 3.38%.
Apple ($878,937,967)
Apple (AAPL 0.59%) pays a relatively modest dividend of less than $1 per share. But when you own over 915 million shares, like Buffett does, that adds up to a big annual paycheck for holding the stock. Apple has been one of Buffett’s best performers this year, and he’s continued to add to his position in 2023.
The company has continued to capitalize on its position as the leading smartphone, tablet, and smartwatch manufacturer. Its brand gives it tremendous pricing power, and that shows up in its gross margin. Its gross margin expanded 80 basis points over the past year to 44.1%.
The biggest story for Apple is its expanding services segment. Services have managed to mitigate declining device sales this year, helping Apple maintain strong net income performance. In fact, Apple’s net income increased in the second half of the year despite a decline in total net sales and an increase in operating expenses.
The sales of Apple’s popular devices and services are an absolute cash cow for the company and its investors. While the tech giant is reinvesting heavily in research and development to fuel its future growth, it has plenty of cash to spare for its massive capital return program. It authorized a $90 billion share repurchase program in May and raised its dividend for the 11th straight year. Investors can expect that trend to continue for the foreseeable future.
Apple shares currently trade at a premium price with a forward P/E ratio over 28. That said, there are a few reasons the stock deserves a premium price, not least of which is its capital return program, and it may very well still deserve a spot in your portfolio.
Occidental Petroleum ($867,853,018)
Buffett’s company owns a 25% stake in Occidental Petroleum‘s (OXY 1.58%) common stock, which pays a dividend of $0.72 per year for a small 1.14% yield. But it’s paying Buffett a lot more than that.
Buffett acquired $10 billion of preferred Occidental Petroleum shares in 2019 when it raised funds to acquire Anadarko. Those shares pay an 8% dividend. While Occidental’s bought back nearly 12% of those shares, Buffett’s still set to collect an extra $706.5 million from Occidental over the next year if he keeps his current stake.
The Anadarko acquisition left Occidental with a huge amount of debt right before the start of the pandemic. And when oil prices plunged, the company suspended its dividend. This precarious position left shares trading around $11 per share in March 2020. Buffett actually sold his initial position in Occidental during that period for a substantial loss.
But he came back to the company’s common stock in 2022 after it reinstated its dividend, buying a whopping 15% stake in the company by the end of March. He’s continued to add to that position over the last year and a half and secured regulatory approval to buy up to 50% of the entire company.
Buffett’s been buying Occidental with good reason. The balance sheet is back on track. Its position in the Permian Basin gives it a source of low-cost oil production. And it’s more focused on increasing the efficiency of its existing facilities than expanding into new oil production. That should give it a steady stream of growing free cash flow to return to shareholders.
Meanwhile, the stock trades for just 7.2 times free cash flow. That’s well below its historic levels, which means there’s still an opportunity to buy one of Buffett’s favorite companies at a fair price.
This content was originally published here.
