Led by legendary CEO, Warren Buffett, Berkshire Hathaway has become one of the most successful companies in history, delivering great returns for long-term shareholders. With a market capitalization of approximately $990 billion, Berkshire is one of the largest companies in the world S&P500 and the eighth largest company in the world.
Although Berkshire Hathaway doesn’t pay dividends, Buffett and his advisors have built the company’s stock portfolio around companies that do — and the Oracle of Omaha’s portfolio construction has helped his company crush the broader market.
Read on for a look at the two dividend-paying S&P 500 stocks that represent 42.4% of Berkshire’s $315.4 billion stock portfolio.
This tech giant is still Buffett’s biggest bet
Keith Noonan: Even after almost half of it was sold Apple (NASDAQ: AAPL) position last quarter, Berkshire still owns 400 million shares of the tech giant. Apple remains the largest holding in Berkshire’s portfolio, accounting for approximately 29.4% of the company’s total stock holdings. With a market capitalization of just over $3.5 trillion, Apple is also the largest component of the S&P 500 and the largest company in the world.
Apple’s dividend yield of 0.4% may not seem like much right now. On the other hand, it’s still a significant source of revenue for Berkshire. With a quarterly dividend of $0.25 per share, Apple is on track to generate $400 million in dividend income for Buffett’s company over the next year, even if the tech giant doesn’t increase its payout. Although Apple has only increased its payouts by about 30% over the past five years, the company has increased its payouts for thirteen years in a row. So there’s a good chance the company will realize another payout increase next year and beyond. .
Crucially for a dividend-paying company, Apple’s business is a cash-generating machine. Thanks in large part to its incredibly successful mobile hardware business, the company has also frequently been ranked as the world’s most profitable company over the past decade.
While most players in the mobile market have been hit by commodification trends that have driven down prices and tightened margins, Apple’s brand strength and loyal customer base have helped the company continue to post fantastic profitability with its iPhone hardware. In the second quarter, iPhone lines accounted for approximately 45% of total global smartphone market sales. Even more impressive, Apple accounted for approximately 85% of total global corporate revenue in this category.
Apple has a dominant position in the mobile hardware industry, and its software and services, wearables and computing businesses also generate significant revenue. With a strong core of businesses and untapped growth opportunities ahead, Apple will likely be a major passive income generator for Berkshire and Buffett for many years to come.
One of Buffett’s favorites from way back when
Jennifer Saibil: American Express (NYSE:AXP) is one of Buffett’s longest-held stocks, and he has praised it for its global brand and dividend. It slipped to second place as Buffett’s largest holding after he sold some of his position Bank of America earlier this year, and it accounts for 13% of the total portfolio.
The company is known for its elite credit cards, but has a full financial services platform with merchant and consumer sides. The company operates a closed system, meaning it funds its own credit cards rather than relying on partnerships with banks, and charges annual fees on most of its credit cards. The closed system ensures that sufficient cash is available, and the membership model results in customer loyalty and profitability; Card membership fees go straight to the bottom line.
Because it is a savings and deposit bank, American Express generates net interest income in addition to profits from operating its card business. While it has had to increase its loss provisions to account for defaults in the high interest rate environment, it has grown net interest income significantly, up 20% annually in the second quarter. Net income increased by 39% year on year.
Its proprietary cards are resonating with a younger group of affluent customers who like the benefits and rewards, beyond the classic core customer, and card costs rose 16% year-on-year (currency neutral) in the second quarter. Since the high inflation and high interest rate environment began in 2021, American Express has grown revenues by nearly 50%, cardholder spending has increased by nearly 40%, and 23 million new cards have been added. It is also accepted by an additional 30 million merchants, creating strong network effects.
Thanks to strong cash generation and profitability, the dividend is a no-brainer. American Express has paid dividends since 1989 and has grown 169% over the past ten years. It yields 1% at the current price, lower than average, because the share price is rising. It’s up 43% year to date, outperforming the S&P 500’s gain of 20%.
Buffett noted in a recent shareholder letter that Berkshire Hathaway completed its purchase of shares of American Express in 1995 for a total of approximately $1.3 billion. American Express’s annual stock dividends rose from $41 million at the start to $302 million in 2022, and he’s confident that amount will continue to rise.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil holds positions at American Express and Apple. Keith Noonan has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
42.4% of Warren Buffett’s $315.4 Billion Berkshire Hathaway Portfolio Is Invested in These Two S&P 500 Dividend Stocks Originally published by The Motley Fool
