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The Embarrassingly Easy Way Warren Buffett Is Raking in Over $12 Billion Annually for Berkshire Hathaway

Motley Fool - Wed Nov 15, 2023

For nearly six decades, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has been putting on a clinic for professional and everyday investors. Since taking over as CEO in the mid-1960s, he's overseen just shy of a 4,300,000% aggregate return in Berkshire's Class A shares (BRK.A) as of the closing bell on Nov. 10, 2023.

The Oracle of Omaha's "recipe" for success is a regular topic of discussion. Typically, Buffett and his investment team gravitate to time-tested, profitable businesses with flexible balance sheets, strong brand names, and trusted management teams.

But it also helps when your money is doing some of the heavy lifting. With minimal effort, Warren Buffett is overseeing the collection of more than $12 billion in annual income using two incredibly simple strategies that any investor can follow.

A jubilant Warren Buffett at Berkshire Hathaway's annual shareholder meeting.

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

Berkshire Hathaway is on track to collect more than $6 billion in annual dividend income

As of Nov. 10, Berkshire Hathaway's $350 billion investment portfolio consisted of more than 50 securities. A majority of the stakes Buffett's company holds are in businesses that pay a regular dividend. Although putting money to work in dividend stocks isn't fancy or groundbreaking, it tends to be a highly successful strategy for patient investors.

Approximately 10 years ago, the wealth-management division of America's largest bank by assets, JPMorgan Chase, released a report that compared the performance of companies initiating and growing their payouts between 1972 and 2012 to publicly traded companies that don't offer a payout. Researchers found that the dividend payers produced an annualized return of 9.5% over four decades, while the non-payers generated annualized returns of a mere 1.6% over the same span.

Since dividend stocks tend to be profitable on a recurring basis and time-tested, they're just the type of businesses a long-term investor like Warren Buffett will appreciate.

Over the coming 12 months, Berkshire Hathaway is on pace to collect more than $6 billion in dividend income. Interestingly enough, nearly half of this dividend income ($2.83 billion) is expected to come from just three stocks:

  • Bank of America(NYSE: BAC): $991,537,926
  • Occidental Petroleum(NYSE: OXY): $964,196,739 (including preferred stock dividends)
  • Apple(NASDAQ: AAPL): $878,937,967

Money-center giant Bank of America is Berkshire's top income stock. Aside from being cyclical and enjoying disproportionately long periods of economic growth, Bank of America is perfectly positioned to benefit from a higher interest rate environment. No large U.S. bank is more interest-sensitive than BofA, with its net-interest income increasing by the billions each quarter relative to where things stood in 2021.

Energy stock Occidental Petroleum has been one of Berkshire's top buys since the start of 2022. Though Buffett's company is generating close to $164.2 million in annual dividend income from the more than 228 million shares of common stock it owns in Occidental, the bulk ($800 million) derives from the $10 billion in Occidental preferred stock Berkshire holds yielding 8%. Berkshire received this preferred stock by handing over $10 billion to help fuel Occidental's acquisition of Anadarko in 2019.

Meanwhile, Apple is a capital-return juggernaut. The $15 billion it parses out in dividends each year is second only to Microsoft. Furthermore, Apple has repurchased more than $600 billion worth of its common stock since its buyback program commenced in 2013.

The point being that Warren Buffett is allowing his $350 billion investment portfolio to generate meaningful income for his company each year, and neither he nor his investment team have to lift a finger.

A fanned pile of one-hundred dollar bills set atop an even larger fanned pile of U.S. savings bonds.

Image source: Getty Images.

Buffett's company is raking in north of $6 billion in annual interest income on short-term Treasuries

However, owning dividend stocks isn't the only way the Oracle of Omaha and his team are generating embarrassingly easy income for Berkshire Hathaway.

The company's recently filed third-quarter operating results show that Berkshire has more than $1 trillion in assets. Among its listed assets are $126.4 billion worth of "short-term investments in U.S. Treasury bills."

Treasury bills are U.S. government debt securities set to mature in four, 13, 26, or 52 weeks (one year). Whereas Treasury bonds and notes have fixed interest rates over a defined maturity timeline, Treasury bills are simply sold at a discount to their face value. When these short-term debt securities mature in a few weeks, months, or one year, the owner is made whole, generating a positive "yield."

3 Month Treasury Bill Rate Chart

3 Month Treasury Bill Rate data by YCharts.

With the Federal Reserve forced to get aggressive to combat historically high inflation, Treasury debt securities have soared at least in relation to where they had been. This increase in yield has been particularly pronounced for short-term Treasury bills (T-Bills). Since the start of 2022, the yield on three-month T-Bills has jumped from 0.05% to around 5.3%.

In other words, the historically high cash balance that Buffett and his investment team are sitting on is likely earning 5% (or perhaps slightly more) on an annualized basis. That's more than $6 billion in annual interest income with very minimal effort (i.e., placing the buy order when U.S. government debt securities are being sold).

This is a particularly attractive approach at the moment given that stocks aren't cheap. Between Oct. 1, 2022 and Sept. 30, 2023, Buffett has overseen more than $38 billion in net-equity sales. Though he and his investing lieutenants (Todd Combs and Ted Weschler) are adding to some existing holdings, they've predominantly been net sellers as stock valuations have risen to historically unsustainable levels. Being able to collect an extremely safe 5% (or greater) yield, which currently tops the prevailing inflation rate, is an offer Warren Buffett is unlikely to turn down.

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JPMorgan Chase and Bank of America are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, JPMorgan Chase, and Microsoft. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

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