People wonder how Buffett got so wealthy. What they don’t often know is quite how wealthy he gets every year, even if he did nothing else but sit on his existing portfolio.
Much like a water hose filling up a bucket, Buffett’s wealth grows almost inevitably thanks to a multi-billion dollar dividend income stream that pours out money like there’s no tomorrow.
His holding company, Berkshire Hathaway gets paid a staggering $2.7 billion annually from just 3 stock holdings alone.
Chevron (CVX) is one of Buffett’s largest holdings. To be precise, it’s his third largest holding, representing 8.0% of his equity portfolio. It’s also one of his biggest buys over the last two quarters; he’s added over half a billion worth of Chevron shares to Berkshire’s equity portfolio. And his bet has paid off handsomely. Over the past year, Chevron is up 34.96%.
One reason Buffett has jumped on board the energy giant is that it has increased its base annual payout for over three decades. Currently, the Oracle of Omaha’s holding company will collect over $960 million annually. If management continues to increase the payout as it has historically, Buffett’s firm should be pulling in north of $1 billion a year from this energy holding alone soon.
Besides an appetizing payout, what other reasons are there to invest in this world-leading energy company? Chevron has demonstrated scintillating revenue figures on a year over year basis in recent quarters:
- 2021 Q2: 126%
- 2021 Q3: 77.3%
- 2021 Q4: 84.6%
- 2022 Q1: 68.3%
- 2022 Q2: 81.0%
- 2022 Q3: 49.2%
In addition, Chevron maintains a strong balance sheet and generated over $12.2 billion in free cash flow last quarter. Plus, the company is investing in growth as well as new energy sources.
When we ran the numbers on Chevron, we arrived at fair value of $208 per share, suggesting as much as 17% upside is on the cards.
Bank of America
Buffett has long been a fan of bank stocks, including Bank of America (BAC), his second-largest holding. It currently represents a 10.3% weighting in Berkshire’s equity portfolio.
Thanks to warrants from over a decade ago that were subsequently converted, Berkshire has over one billion shares of BofA, valued at north of $30 billion, meaning his holding company is forecast to bring in almost $910 million in dividend income over the next twelve months.
What makes Bank of America particularly appealing to Buffett is its interest rate sensitivity. Bank of America is poised to profit from rising rates, which in turn should boost its own bottom line.
And if Buffett sees what we see, fair value for Bank of America sits exactly 30.0% higher at $45.33 per share, meaning the 91 year old Omaha Sage is set to reap even more profits from this long-standing holding.
Another mega energy stock, Occidental Petroleum (OXY), was on the radar of many investors last year, including Buffett. Berkshire snapped up $2.2 billion worth of OXY over the past two quarters according to his 13F filings. OXY now represents 4.0% of his portfolio – his sixth largest holding overall and is set to produce over $900 million in dividends.
While both Chevron and Occidental Petroleum overlap in some areas, Occidental is more heavily invested in high-margin drilling. In short, when oil prices rise OXY is set to benefit to a greater extent than Chevron. That should be a key clue that Buffett expects higher oil prices for longer than most expect.
OXY doesn’t have as pristine a balance sheet as Chevron; it’s saddled with $21.4 billion in debt but that’s about half the amount on its balance sheet as of Q1 2021 for comparison’s sake. Higher oil prices have undoubtedly benefited the company and should continue to do so.
How high could OXY go? We see fair value sitting at $87 per share, or 36.1% upside potential based on a discounted cash flow forecast analysis.