Under the leadership of its legendary chief executive officer, Warren Buffett, Berkshire Hathaway has become one of history’s most successful companies and delivered stellar returns for long-term shareholders. With a market capitalization of roughly $990 billion, Berkshire stands as one of the biggest companies in the S&P 500 and the eighth-largest company in the world.

While Berkshire Hathaway doesn’t pay a dividend, Buffett and his advisors have built the company’s stock portfolio around companies that do — and the Oracle of Omaha’s portfolio composition has helped his company crush the broader market.

Read on for a look at the two dividend-paying S&P 500 stocks that account for 42.4% of Berkshire’s $315.4 billion stock portfolio.

This tech giant is still Buffett’s biggest bet

Keith Noonan: Even after selling nearly half of its Apple (NASDAQ: AAPL) position last quarter, Berkshire still owns 400 million shares of the tech giant’s stock. Apple continues to be the largest position in Berkshire’s portfolio and accounts for roughly 29.4% of the company’s total stock holdings. With a market cap of just over $3.5 trillion, Apple also stands as the biggest component in the S&P 500 and the world’s largest company.

Apple’s dividend yield of 0.4% may not look like much right now. On the other hand, it’s still a substantial income generator for Berkshire. With its quarterly dividend sitting at $0.25 per share, Apple is on track to deliver $400 million in dividend income for Buffett’s company during the next year even if the tech giant does not raise its payout. Although Apple has only raised its payout by roughly 30% during the past five years, the company has increased its payout on an annual basis for 13 years running — so there’s a good chance that the company will deliver 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 ranked as the world’s most profitable business during the past decade.

While most players in the mobile market have been hit by commodification trends that have pushed down prices and crushed margins, Apple’s brand strength and loyal customer base have helped the company continue to record fantastic profitability with its iPhone hardware. In the second quarter, iPhone lines accounted for roughly 45% of total worldwide revenue in the smartphone market. Even more impressive, Apple accounted for roughly 85% of total global operating income in the category.

Story continues

Apple has a dominant position in the mobile hardware industry, and its software and services, wearables, and computers operations also generate substantial amounts of cash. With a strong core of businesses and untapped growth opportunities still ahead, Apple will likely be a significant passive income generator for Berkshire and Buffett for many years to come.

One of Buffett’s longtime favorites

Jennifer Saibil: American Express (NYSE: AXP) is one of Buffett’s longest-held stocks, and he has lauded it for its global brand and dividend. It slid into the No. 2 spot as Buffett’s largest holdings after he sold some of his position in 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 it has a full financial services platform with merchant and consumer sides. It operates a closed-loop system, which means it funds its own credit cards instead of relying on partnerships with banks, and it charges annual fees for most of its credit cards. The closed-loop system keeps it flush with cash, and the membership model results in customer loyalty and profitability; card membership fees go straight to the bottom line.

Because it’s a bank with savings accounts and deposits, American Express generates net interest income in addition to profit from running its card business. Although it’s had to increase its provisions for losses to account for defaults in the high-interest rate environment, it has increased net interest income significantly — 20% year over year in the second quarter. Net income increased 39% year over year.

Its proprietary cards are resonating with a younger group of affluent customers who like its perks and awards, in addition to its classic core customer, and card fees increased 16% year over year in the second quarter (currency neutral). Since the high-inflation, high-interest rate environment started in 2021, American Express’ revenue has increased by almost 50%, cardmember spending is up nearly 40%, and it’s added 23 million new cards. It’s also accepted by 30 million more merchants, leading to strong network effects.

Strong cash generation and profitability make the dividend a no-brainer. American Express has paid a dividend since 1989, and it’s grown 169% during the past 10 years. It yields 1% at the current price, lower than average, because the stock price is rising. It’s up 43% year to date, outperforming the S&P 500 gain of 20%.

Buffett noted in a recent shareholder letter that Berkshire Hathaway completed its purchase of American Express stock in 1995 for a total cost of about $1.3 billion. Its annual dividends from American Express stock increased from $41 million at the outset to $302 million in 2022, and he’s fully confident in that amount continuing to rise.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 774% — a market-crushing outperformance compared to 169% for the S&P 500.*

They just revealed what they believe are the 10 best stocks for investors to buy right now… and Apple made the list — but there are 9 other stocks you may be overlooking.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

American Express is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has positions in American Express and Apple. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has 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 2 S&P 500 Dividend Stocks was originally published by The Motley Fool