Move over, Bank of America! You Are No Longer Warren Buffett’s Top Dividend Stock — This Company Is…

If you’ve ever wondered why professional and everyday investors pay so much attention to which stocks Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.72%) CEO Warren Buffett buys and sells, look no further than his track record. Since taking over as CEO in the mid-1960s, he has presided over an aggregate return of his company’s Class A shares of nearly 5,470,000% as of the closing bell on September 12.

The Oracle of Omaha’s “recipe” for success involved buying time-tested businesses with sustainable competitive advantages and hanging on to those investments for long periods of time. Basic holdings Coca cola and American Expresswhich Buffett’s company has owned since 1988 and 1991, respectively, are perfect examples of branded businesses with sustainable moats.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

However, dividend stocks have played an equally important role in Buffett’s long-term success. Companies that regularly share a percentage of their profits with investors tend to be recurringly profitable and time-tested.

More importantly, dividend stocks have demonstrably outperformed non-payers over the past half century. In The Power of Dividends: Past, Present and Futureinvestment advisers at Hartford Funds note that dividend stocks have more than doubled the average annual return of defaulters over the past 50 years (1973-2023): 9.17% versus 4.27%.

Based on Berkshire Hathaway’s existing portfolio, Buffett and his investment team should oversee the collection of more than $5 billion in dividend income over the next 12 months. But most of that dividend income can be traced back to just a few top holdings.

Although Bank of America (BAC -0.34%) was Buffett’s best dividend stock, his recent central bank selling activity has allowed another income stock to take that honor.

Move over, Bank of America: You’re no longer Warren Buffett’s top dividend stock

On July 24, about four weeks after the Federal Reserve’s latest round of annual stress tests was released, Bank of America’s board announced plans to raise its quarterly payout by 8% to 0, $26 per share, as well as a return of up to $25 billion. to its shareholders through buybacks. With Berkshire entering the third quarter with more than 1.03 billion BofA shares in its portfolio, that position alone would have generated $1.07 billion in dividend income over the next 12 months.

But on July 17th, the Oracle of Omaha started putting the brakes on Bank of America shares and hasn’t stopped since. Between July 17 and September 10, over a 39-day trading period, Buffett was a seller of BofA stock in 27 of those sessions. In total, Berkshire’s stake in the bank’s once-favorite Buffett stock has been reduced by nearly 174 million shares as of this writing.

One possible reason behind this selloff is Buffett’s desire to lock in gains ahead of an expected easing cycle by the nation’s central bank. No central bank is more interest-sensitive than Bank of America. When interest rates fall, net interest income will be affected more than other large banks.

Buffett could also sell for tax purposes. He proclaimed during Berkshire Hathaway’s annual shareholder meeting in early May that corporate tax rates are likely to rise. Thus, locking in sizable windfalls now will, in hindsight, be a smart move.

It is also possible that the Oracle of Omaha simply wants little to do with a historically expensive stock market.

Whatever the reasons behind its active selloff in BofA stock, Berkshire Hathaway still held 858,180,506 shares as of the September 10th closing bell. With Bank of America handing out a basic annual payout of $1.04 per share, this stake would yield a hefty profit. $892,507,726 in dividend income over the next 12 months, assuming no further selling activity.

But $892.5 million isn’t good enough to top the dividend stocks in Warren Buffett’s portfolio.

Image source: Getty Images.

Oracle of Omaha’s top dividend stocks will generate nearly $904 million each year

The latest round of selling in BofA took out one of Buffett’s favorite stocks to buy over the past two years and more, the energy major Occidental Petroleum (OXY 0.12%)on the pedestal in terms of dividend income.

Since the beginning of 2022, Berkshire’s brightest minds have acquired 255,281,524 shares of Occidental Oil and Gas. Given that Occidental distributes a dividend of $0.22 per share each quarter, Buffett’s common stock position is expected to generate $224,647,741 in dividend income over the next 12 months.

However, Buffett’s company also owns $8.489 billion in Occidental Petroleum preferred stock, which yields 8% annually. That’s an additional $679,120,000, which, combined with the income received from Berkshire’s common interest in Occidental, increases the 12-month dividend haul to $903,767,741!

One of the main reasons Buffett can’t stop buying Occidental Petroleum stock is his belief that the spot price of oil will remain high or even rise further. In addition to being an in-demand global resource, crude oil supplies have been constrained by Russia’s invasion of Ukraine and years of capital spending cuts by global energy majors during the COVID-19 pandemic. When the supply of a key product is reduced, it is not unusual for its price to receive a boost.

While a higher spot crude oil price helps all drillers, it’s a huge positive for Occidental, which generates the lion’s share of its revenue from its upstream drilling operations. If oil prices rise, Occidental enjoys greater growth in operating cash flow than other integrated energy companies. Be warned that the opposite is also true. If the spot price of crude oil falls, Occidental’s operating cash flow may take a bigger hit than other integrated oil and gas operators.

In addition, Berkshire Hathaway holds warrants for 83,858,848.81 common shares of Occidental stock that are exercisable at $59.624 per share. It is in Buffett’s and Berkshire’s best interest that Occidental’s stock price remain above this exercise price.

In mid-2017, the Oracle of Omaha exercised warrants to buy 700 million BofA shares at just $7.14 per share. When they were executed, Bank of America stock was trading near $24 per share, resulting in a sizeable gain for Buffett and his company. He would like to repeat this success with Occidental.

But even if those warrants aren’t exercised, that doesn’t change the fact that Occidental Petroleum is now Warren Buffett’s top dividend stock.