Sarah BradyUpdated on: October 12, 2024 6:47 am GMT
Warren Buffett, the chief executive of Berkshire Hathaway, has long been a guiding figure in the investment world. With a track record of immense returns, his investment choices can send ripples through the market. Recently, his selling of Bank of America shares has shifted the spotlight to another strong performer in his portfolio: Occidental Petroleum.
Berkshire Hathaway’s Dividend Strategy
Since becoming CEO in the mid-1960s, Buffett has embraced a philosophy that combines investing in durable businesses with a commitment to producing dividends. His goal has been to create wealth over the long term, focusing on companies with established brand value and competitive advantages.
- Investment Philosophy: Buying time-tested businesses with sustainable competitive advantages.
- Focus on Dividends: Companies that consistently share profits tend to perform better over time.
A report by Hartford Funds titled “The Power of Dividends: Past, Present, and Future” highlights the benefits of dividend stocks. The findings are clear:
- Dividend Stocks: Average annual return of 9.17%.
- Non-Dividend Stocks: Average annual return of 4.27%.
Buffett’s portfolio is projected to generate over $5 billion in dividend income in the coming year, with a few key holdings leading the way.
Bank of America Loses Its Crown
Once upon a time, Bank of America was Buffett’s top dividend stock, primarily due to its substantial dividends. On July 24, the bank announced an 8% increase in its quarterly payout to $0.26 per share, alongside a $25 billion return of capital to shareholders through buybacks.
Berkshire Hathaway held a significant position in Bank of America, owning over 1.03 billion shares, which would have reaped more than $1.07 billion in dividends. However, Buffett’s recent actions have painted a different picture.
Between July 17 and September 10, he sold shares on 27 occasions, reducing Berkshire’s stake by around 174 million shares. The reasons behind this selling spree could be multifaceted:
- Interest Rate Sensitivity: Bank of America is highly sensitive to changes in interest rates. Lower rates could cause its income to suffer.
- Tax Implications: Buffett has hinted at rising corporate tax rates and may be choosing to lock in gains.
- Market Concerns: Buffett might also be wary of the current lofty stock market valuations.
Despite his significant sell-off, Berkshire Hathaway still retains 858,180,506 shares in Bank of America, which will yield an estimated $892.5 million in dividends over the next 12 months, assuming no further sales.
Occidental Petroleum Takes the Lead
As Buffett shifts away from Bank of America, Occidental Petroleum has risen to prominence within his portfolio. Since the beginning of 2022, Berkshire has acquired 255 million shares of Occidental. The company pays a quarterly dividend of $0.22 per share, positioning it to generate approximately $224.6 million in dividends over the next year based on current holdings.
Key details about Occidental’s performance include:
- Current Dividend Rate: $0.22 per share, paid quarterly.
- Projected Annual Dividend Income: $224,647,741.
The momentum behind Occidental’s rise in importance also reflects a strategic pivot by Buffett toward the energy sector amid fluctuating oil prices.
Conclusion
Warren Buffett’s investment decisions resonate with many investors, and his recent shift away from Bank of America to Occidental Petroleum encapsulates a broader narrative of evolving investment strategies. As he questions the long-term viability of certain stocks amidst looming economic changes, Berkshire Hathaway’s strategy continues to emphasize the significance of dividends.
Investors should watch what Buffett does. He often says it’s important to know not just how the market works, but also to understand the companies that sell stocks. Every choice he makes, whether for earning dividends or for growth, gives us a better idea of how the market is changing.
