Move over, Bank of America! You're no longer Warren Buffett's highest dividend stock – this company is…

If you have ever wondered why professional and everyday investors pay so close attention to which stocks Berkshire-Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett buys and sells, and his track record shows that. Since taking over as CEO in the mid-1960s, he has recorded a total return of nearly 5,470,000% on his company's Class A shares through the close of trading on September 12.

The Oracle of Omaha's recipe for success was to buy proven companies with sustainable competitive advantages and to hold these investments over longer periods of time. Core investments Coca-Cola And American Expresswhich have been owned by Buffett's companies since 1988 and 1991 respectively, are perfect examples of branded companies with sustainable moats.

However, dividend stocks have played an equally important role in Buffett's long-term success. Companies that regularly pay out a percentage of their earnings to their investors tend to be consistently profitable and have a proven track record over long periods of time.

More importantly, dividend-adjusted stocks have been proven to outperform non-dividend-paying stocks over the past half century. The Power of Dividends: Past, Present and FutureHartford Funds investment advisors point out that over the past 50 years (1973-2023), dividend-paying stocks have more than doubled the average annual return of non-payers: 9.17% versus 4.27%.

Based on Berkshire Hathaway's existing portfolio, Buffett and his investment team are expected to generate well over $5 billion in dividend income over the next twelve months. However, the majority of this dividend income will come from just a few top holdings.

Although Bank of America (NYSE: BAC) had been Buffett's highest dividend stock, but his recent selling activity at the central bank allowed another income stock to take that honor.

Make way, Bank of America: You are no longer Warren Buffett's highest dividend stock

On July 24, about four weeks after the release of the Federal Reserve's latest round of annual stress tests, Bank of America's board announced plans to increase its quarterly payout by 8% to $0.26 per share and return up to $25 billion to shareholders through buybacks. With Berkshire entering the third quarter with more than 1.03 billion BofA shares in its portfolio, this position alone would have generated more than $1.07 billion in dividend income over the next 12 months.

But on July 17, the Oracle of Omaha began putting the brakes on Bank of America shares and hasn't stopped since. Between July 17 and September 10, a span of 39 trading days, Buffett sold BofA shares in 27 of those sessions. In total, Berkshire's stake in Buffett's once-favorite bank stock has been reduced by nearly 174 million shares at the time of this writing.

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One possible reason for these sales is Buffett's desire to lock in profits ahead of an expected Federal Reserve rate-cutting cycle. No other central bank is more sensitive to interest rates than Bank of America. If interest rates fall, its net interest income will be hit harder than other large banks.

Buffett may also be selling for tax reasons. During Berkshire Hathaway's annual shareholder meeting in early May, he announced that corporate tax rates are likely to rise, so locking in significant unrealized gains now will be a smart move in hindsight.

It is also possible that the Oracle of Omaha simply wants nothing to do with a historically high stock market.

Regardless of the reasons for its active selling of BofA stock, Berkshire Hathaway still held 858,180,506 shares as of the close on September 10. Since Bank of America pays an annual base distribution of $1.04 per share, this stake would generate a tidy dividend income of $892,507,726 over the next 12 months, assuming no further sales.

But $892.5 million is not enough to take the top spot among dividend stocks in Warren Buffett's portfolio.

The Oracle of Omaha's highest dividend stock will bring in nearly $904 million each year

The latest round of selling at BofA has overshadowed one of Buffett's favorite stocks of the past two years, the energy giant. Occidental Petroleum (NYSE:OXY)on the podium in terms of dividend income.

Since the beginning of 2022, Berkshire's brightest minds have purchased 255,281,524 shares of oil and gas company Occidental. Since Occidental pays a dividend of $0.22 per share each quarter, Buffett's common stock position is expected to generate $224,647,741 in dividend income over the next 12 months.

However, Buffett's company also holds $8.489 billion in Occidental Petroleum preferred stock, which yields 8% annually. That's an additional $679,120,000, which, when combined with the income from Berkshire's common stock stake in Occidental, brings the dividend payout for the last 12 months to $903,767,741!

One of the main reasons Buffett can't stop buying Occidental Petroleum shares is the belief that the spot price of oil will remain high or even rise further. Aside from crude being a sought-after global resource, crude oil supplies have been constrained by Russia's invasion of Ukraine and several years of reduced capital spending by global energy majors during the COVID-19 pandemic. When the supply of a key commodity is tight, it's not unusual for its price to rise.

Although a higher spot price for crude oil helps all drillers, it is particularly positive for Occidental because the company generates the lion's share of its revenue from its upstream drilling activities. When oil prices rise, Occidental benefits from a larger increase in its operating cash flow than other integrated energy companies. But be warned that the opposite is also true. When the spot price for crude oil falls, Occidental's operating cash flow can suffer more than other integrated oil and gas companies.

In addition, Berkshire Hathaway owns warrants for 83,858,848.81 shares of Occidental common stock, which are exercisable at $59.624 per share. It is in Buffett's and Berkshire's best interest that Occidental's stock price remain above this exercise price.

In mid-2017, the Oracle of Omaha exercised warrants to buy 700 million shares of BofA at just $7.14 per share. When the warrants were exercised, Bank of America was trading at about $24 per share, giving Buffett and his company a sizable profit. He would like to repeat that success with Occidental.

But even if these warrants are not exercised, it does not change the fact that Occidental Petroleum is now Warren Buffett's highest dividend stock.

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American Express and Bank of America are promotional partners of The Ascent, a Motley Fool company. Sean Williams has a position in Bank of America. The Motley Fool has a position in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Move over, Bank of America! You're no longer Warren Buffett's top dividend stock—this company is… was originally published by The Motley Fool