1 Investment Is Paying Warren Buffett $14 Billion Per Year – Here’s What it Is

Warren Buffett loves dividend stocks and has invested in many of them through Berkshire Hathaway‘s (BRK.A -0.21%) (BRK.B 0.03%) massive stock portfolio.

Some of these create a lot of income for the company, which can then be reinvested as Buffett and his team see fit, or can be used to grow Berkshire’s cash stockpile. As one example, Berkshire owns 400 million shares of Coca-Cola, each of which pays $1.94 in dividends annually. So, Berkshire is earning $776 million just for owning Coca-Cola stock. In all, Berkshire’s stock portfolio is generating about $6 billion in annual dividend income.

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

Berkshire is generating $14 billion in annual income from one investment

Berkshire Hathaway sold $97 billion worth of stock in the first six months of 2024, and this has led to a massive stockpile of cash. At the end of the second quarter (June 30), Berkshire held about $277 in cash and short-term investments.

However, it’s important for investors to realize that this isn’t simply a giant pile of money sitting in a vault somewhere. $234.6 billion of this was held in short-term Treasury bills, while the rest was held in cash and cash equivalents (things like money market funds), although this latter category also includes Treasuries that have maturities of three months or less.

As of this writing, here are the yields on short-term Treasury bills of certain maturities:

Data source: CNBC.

For simplicity, we’ll say that Berkshire generates a 5% annualized yield right now from the cash, equivalents, and short-term investments portion of its balance sheet.

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

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

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

For one thing, business valuations remain high on a historic basis. This has been Buffett’s main reason for not making any major acquisitions in recent years, even when interest rates were low. And now that the cash has become a reasonably productive asset for Berkshire, Buffett is likely in even less of a hurry.

After all, between the stock portfolio and its cash hoard, Berkshire is bringing in about $20 billion in annual income that can be used to invest however Buffett and his team see fit.

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

What happens when interest rates fall?

Berkshire’s cash stockpile is paying roughly 5% annually right now, but it’s also important to note that as soon as the Federal Reserve starts lowering interest rates, this will change. Short-term Treasury securities tend to follow the Fed’s rate moves very closely. 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 for a total of two percentage points of federal fund rate cuts between now and Sep. 2025. Assuming this happens, and the lower rate is reflected in short-term Treasury securities, this could translate into a $5.5 billion income reduction for Berkshire. https://www.cmegroup.com/markets/interest rates/cme-fedwatch-tool.html

Now, I’m not saying that Buffett is going to be in a big rush to spend hundreds of billions of dollars when rates start to fall. But at some point, keeping $277 billion on the balance sheet becomes far less attractive.