1 Investment Makes Warren Buffett $14 Billion a Year — Here’s What It Is

Warren Buffett loves dividend stocks and has invested in many of them through Berkshire Hathaway‘S (NYSE: BRK.A)(NYSE: BRK.B) huge stock portfolio.

Some of these create a lot of earnings for the company, which can then be reinvested if Buffett and his team so desire, or can be used to grow Berkshire’s cash hoard. As an example, Berkshire owns 400 million shares of Coca-Cola stock, each of which pays $1.94 in dividends per year. So Berkshire earns $776 million just for owning Coca-Cola stock. In total, Berkshire’s stock portfolio generates about $6 billion in annual dividend income.

There is one Berkshire Hathaway investment, however, that makes this look like a relatively small source of income. And you might be surprised what it is.

Berkshire generates $14 billion in annual revenue An investment

Berkshire Hathaway sold $97 billion worth of stock in the first six months of 2024, leading to a enormous cash on hand. At the end of the second quarter (June 30), Berkshire had approximately $277 in cash and short-term investments.

However, it is important for investors to realize that this is not just a big pile of money sitting in a vault somewhere. $234.6 billion of this was held in short-term government bonds, while the rest was held in cash and cash equivalents (such as money market funds). However, this latter category also includes government bonds with maturities of three months or less.

At the time of writing, these are the yields on short-term government bonds with specific maturities:

Data source: CNBC.

For simplicity, we’ll assume that Berkshire currently generates a 5% annual return from the cash, equivalents, and short-term investments on its balance sheet.

A quick calculation shows that 5% of $277 billion is $13.85 billion. So, Berkshire Hathaway’s cash pays the company nearly $14 billion annually. This also equates to about $1.15 billion per month, or about $38 million per day.

Berkshire is in no hurry to spend its money – and it’s easy to understand why

Many investors have been patiently waiting, and waiting, for Buffett and his team to make a big acquisition with their capital. But they may have to wait even longer.

First, corporate valuations remain historically high. This has been Buffett’s primary reason for not making any major acquisitions in recent years, even when interest rates were low. And now that cash has become a fairly productive asset for Berkshire, Buffett is probably in even less of a hurry.

The story continues

After all, Berkshire generates about $20 billion in income annually from its stock portfolio and cash reserves, which Buffett and his team can invest as they see fit.

It’s not just about the income. All that cash gives Berkshire incredible financial flexibility. Sure, Warren Buffett thinks company valuations are high now, but if there’s a recession or a market correction, having $277 billion at your disposal is a luxury that few, if any, other companies would have.

What happens if interest rates fall?

Berkshire’s cash holdings are currently paying about 5% per year, but it’s also important to note that this will change once the Federal Reserve starts cutting interest rates. Short-term government bonds tend to follow the Fed’s interest rate movements terribly accurate. Right now, the benchmark federal funds rate is set at a target range of 5.25%-5.5%. Compare that to the table above.

According to the CME FedWatch tool, the median investor expectation is that the federal funds rate will be cut by a total of two percentage points between now and September 2025. Assuming this happens and the lower rate is reflected in short-term Treasuries, this could result in a $5.5 billion drop in revenue for Berkshire. https://www.cmegroup.com/markets/interest rates/cme-fedwatch-tool.html

Now, I’m not saying Buffett is going to go out and spend hundreds of billions of dollars in a big rush when interest rates come down. But at some point, it’s going to be a lot less attractive to hold $277 billion on the balance sheet.

Should You Invest $1,000 in Berkshire Hathaway Now?

Before you buy Berkshire Hathaway stock, consider the following:

The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.

Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $643,212!*

Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.

View the 10 stocks »

*Stock Advisor returns as of August 6, 2024

Matt Frankel has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

1 Investment Makes Warren Buffett $14 Billion a Year — Here’s What It Is was originally published by The Motley Fool