By the time you finish reading this article, Berkshire Hathaway will be $35,000 richer.
Berkshire is billionaire Warren Buffett’s multinational conglomerate. And its performance over the decades has become one for income investors to match.
You see, the shares Buffett owns in the company’s stock portfolio will pay out over $6 billion in dividends over the next year.
That works out to over $16 million per day.
Or about $11,500 every minute.
With that kind of income rolling in daily, many consider Buffett one of the greatest investors of our time. I certainly do.
That’s why whenever Berkshire makes a move, investors try to mimic it by buying or selling the same stocks.
And it’s recently shown interest in a sector that’s been a hot topic this year: energy. Specifically, it’s targeting an oil and gas company that could become Berkshire’s biggest purchase.
Here at Intelligent Income Daily, my team and I are always looking out for great opportunities to invest in safe income. And we pay attention when legendary investors like Buffett start taking large positions in certain companies.
So today, we’ll break down its latest massive venture… and share why we don’t think it’s a fit for investors like us who focus on reliable income-paying plays in all market conditions.
Berkshire’s Oil and Gas Play of Choice
Berkshire has been on a buying spree this year. In particular, it’s been loading up on shares of Occidental Petroleum (OXY).
Based on recent filings, Berkshire now owns more than 20% of Occidental. Add in the attached warrants, and that could increase its stake to over 26%. It even got permission from regulators to buy up to 50% of the company.
Clearly, Buffett sees the potential in the energy sector and Berkshire could be interested in buying even more shares.
But before you pile into the stock to profit alongside Buffett and Berkshire, here are some things to consider…
As you might have guessed from its name, Occidental Petroleum is an oil company. That means its earnings power fluctuates with the price of oil.
Just this year, oil prices have shot up more than 50% and then drifted back down to where they were before the Ukraine war. You may even remember they went negative briefly during the early days of the pandemic.
Plus, Occidental made some poor decisions recently.
In 2019, the company got into a bidding war to buy a competitor. To finance the deal, it loaded up on debt and had to ask Berkshire for a cash infusion. Then oil prices crashed.
Occidental managed to survive, but it wasn’t pretty. It had to slash its quarterly dividend from 79 cents to a single penny.
With higher oil prices this year, Occidental has finally started to dig itself out of the hole it created for itself. It’s even started to increase its dividend again. But the company still has a non-investment grade speculative credit rating of BB+ from ratings companies Fitch and S&P.
That kind of unpredictability makes holding shares feel like riding a roller coaster – that’s stress income investors like retirees wouldn’t want.
You’ll Find Better Income Plays In the Energy Sector
After assessing the risks, we don’t think Occidental meets our requirements to be a sleep-well-at-night income investment.
It’s difficult to establish any kind of moat in a commodity business like oil. Earnings depend on factors that can’t be controlled and that can put dividend income at risk. That’s just not the kind of thing I want to worry about in my portfolio.
While Occidental is slightly cheaper than peers like Chevron (CVX) and Exxon Mobil (XOM), those companies have less leverage and high-grade credit ratings of AA-. Plus, they both continued growing their dividends through the pandemic.
So while Buffett may see value in Occidental Petroleum, we think income investors would be better off looking elsewhere for reliable returns.
One way to start building a growing dividend income is with the Schwab U.S. Dividend Equity ETF (SCHD). This ETF invests in high-yielding companies with a record of consistently paying dividends. And it’s up around 75% since the pandemic market crash in 2020.
You might not make it to $11,500 per minute in dividends, but a steady source of growing income can help you sleep well at night, no matter what happens in the markets.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily
P.S. Berkshire Hathaway is the world’s largest holding company. Its usual focus on dividend-paying stocks is something that resonates with us here at Intelligent Income Daily.
But Berkshire isn’t the only company that’s good at this model. Tomorrow, my analyst Stephen Hester will tell you about another company that’s following the same path… and in a much earlier stage, so it has plenty of room to grow.