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As much as 2021 might have led you to believe that the stock market only goes up, 2022 has served as an abrupt reminder that this path to prosperity isn’t a straight line. All three major U.S. stock indexes have plunged into a bear market, with growth stocks really taking it on the chin.
But don’t tell that to Berkshire Hathaway (BRK.A 0.67%) (BRK.B 0.78%) CEO Warren Buffett. When the closing bell rang last week, shares of the Oracle of Omaha’s company were outperforming the benchmark S&P 500 by 20 percentage points and were higher on the year by 1%.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
One of Buffett’s keys to outperforming in turbulent environments is to lean on the safety of dividend stocks. Companies that pay a regular dividend are almost always profitable and have stood the test of time.
Over the next 12 months, Buffett’s company is on track to collect more than $6 billion in dividend income. The shocker is that $2.8 billion of this annual dividend income is slated to come from just three stocks.
The leading dividend stock for Berkshire Hathaway is none other than global energy giant Chevron (CVX 2.76%). Chevron is a dividend stock that has increased its base annual payout for 35 consecutive years, and is currently doling out $5.68 a share, which is good enough for a market-topping yield of almost 3.4%. Including the Chevron shares owned by Buffett’s secret portfolio, New England Asset Management, this position is generating more than $964 million in annual dividend income for Berkshire Hathaway.
Let’s be clear: Buffett and his investment team wouldn’t have plowed into energy stocks in 2022 if they didn’t strongly believe that energy commodity prices would remain above their historic averages for the coming years. Certain global dynamics do support this thesis, although a U.S. recession would likely weigh on near-term oil and gas demand.
The biggest positive for crude oil and natural gas prices has been the underinvestment in drilling, exploration, and infrastructure by most energy majors during the COVID-19 pandemic. Paring back capital expenditures means it’ll be difficult to quickly increase energy commodity supply anytime soon. When coupled with Russia’s invasion of Ukraine, which has cast doubt on Europe’s energy supply needs, there’s a real likelihood that crude oil and natural gas prices will stick above their historic norms.
Buffett’s fascination with Chevron probably also involves its integrated operating model. “Integrated” oil and gas companies operate midstream assets, such as pipelines, and downstream assets, like chemical plants and refineries. These midstream and downstream assets help provide predictable cash flow and can be used to hedge against energy commodity price weakness.
Big oil is also known for its hefty capital-return programs. In addition to its juicy dividend, Chevron has pledged to repurchase up to $15 billion worth of its common stock this year.
Have I mentioned that energy stocks are playing a big role in anchoring Berkshire Hathaway’s portfolio in 2022 and bolstering its dividend income?
Since the year began, the Oracle of Omaha and his team have purchased more than 194 million shares of Occidental Petroleum (OXY 2.62%). This common stock is providing more than $101 million in annual income. However, Berkshire Hathaway also owns $10 billion worth of Occidental Petroleum preferred stock that doles out an 8% yield ($800 million a year). Altogether, Buffett is collecting north of $901 million in annual dividend income from Occidental.
As you can probably imagine, the catalysts fueling Occidental Petroleum are really similar to Chevron. Years of underinvestment in drilling and infrastructure (for the energy sector when examined as a whole) combined with Russia’s actions in Ukraine create a scenario where higher energy prices can significantly boost operating cash flow. But there are some differences between the two companies.
For example, even though Occidental is an integrated operator like Chevron, more of its annual revenue is tied to its higher-margin drilling operations. If crude oil and natural gas remain elevated, Occidental can reap the rewards even more so than Chevron.
But there’s a flip side to this benefit. Whereas Chevron has what can arguably be described as the best balance sheet among large oil and gas companies, Occidental was sitting on more than $35 billion in net debt less than two years ago. The good news is the company has whittled away $15 billion in net debt and reignited its share repurchase program as oil prices soared. Whether a tidier balance sheet allows for earnings multiple expansion remains to be seen.
Image source: Getty Images.
The third high-octane income stock in Berkshire Hathaway’s portfolio is Bank of America (BAC 0.18%). Including shares owned by New England Asset Management, the more than 1.03 billion shares of BofA held by Berkshire will help Buffett and his team rake in close to $909 million in annual dividend income.
Usually, bank stocks perform poorly during bear markets and struggle when U.S. economic growth slows or shifts into reverse. But this time could really be different. Whereas the Federal Reserve often comes to Wall Street’s rescue by lowering interest rates to spur lending, the nation’s central bank is, instead, raising interest rates at the fastest pace in decades to combat historically high inflation. Even if a recession were to occur in the U.S., the benefit of rapidly rising rates on Bank of America’s outstanding variable-rate loans should more than offset loan losses.
Among money-center banks, Bank of America is the most interest-sensitive. Not only did its net interest income jump 24% to $13.9 billion during the third quarter, but BofA has estimated that a 100-basis-point parallel shift in the interest rate yield curve will produce $4.2 billion in added net interest income over the next 12 months.
Despite its size, Bank of America is making headway with its digital transformation as well. More than 70% of its 56 million verified digital users are active customers. As a result, 48% of total sales were completed online or via mobile app, and 51 million more transactions were completed via digital peer-to-peer app Zelle (167 million) than traditional check (116 million) in the September-ended quarter. Digital transactions cost banks just a fraction of what in-person interactions run.
And to keep with the theme of this list, bank stocks like BofA have a storied history of sizable capital-return programs. When the U.S. economy is firing on all cylinders, Bank of America can often be counted on to return well in excess of $20 billion to its shareholders via share buybacks and dividends.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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