As 2022 draws to a close, many investors have learned the hard way that stocks don’t always rise.
The Dow Jones is down 10% year-to-date, the S&P 500 is down 20%, while the tech-centric Nasdaq is down a staggering 33%.
A major challenge remains ahead of 2023: the Fed’s still hawkish stance. The latest inflation figure stood at 7.1% for November, down from June’s peak of 9.1%, but still worryingly high.
“The all-time record strongly warns against premature policy easing,” Fed Chairman Jerome Powell said recently. “We will stay the course until the job is done.”
Given this challenging environment, it might be wise to pay attention to an investor who has generated huge returns through business cycles, including periods of high interest rates: Warren Buffett.
From 1965 to 2021, Buffett’s Berkshire Hathaway company (NYSE: BRK. B) achieved compound annual gains of 20.1%, generously beating the S&P 500’s compound annual returns by 10.5% over the same period.
No one spending $1,600 on a fully decorated iPhone 14 Pro Max would call it a bargain. But consumers still love to indulge in the luxury of Apple products (NASDAQ: AAPL).
Earlier this year, management revealed that the company’s active installed base of hardware exceeded 1.8 billion devices.
While competitors offer cheaper devices, millions of users don’t want to live outside the Apple ecosystem. The ecosystem acts as an economic moat, allowing the company to earn oversized profits.
It also means that with inflation spikes, Apple can pass higher costs on to its global consumer base without worrying too much about a drop in sales volume.
Today, Apple is Buffett’s largest publicly traded holding, accounting for about 38% of Berkshire’s portfolio by market value. Of course, the simple increase in Apple’s stock price is one of the reasons for such a concentration. Over the past five years, tech gorilla shares have risen by more than 200%.
Apple currently offers a dividend yield of 0.7%.
Bank of America
Bank of America is Buffett’s second-largest publicly traded holding, occupying 10.4% of the portfolio.
The stock now deserves investors’ attention for a very simple reason: while many sectors fear rising interest rates, banks are looking forward to seeing them.
Banks lend money at higher rates than they borrow, pocketing the difference. When interest rates rise, the spread of how much a bank earns widens.
And it just so happens that Bank of America has increased its payout to shareholders.
Bank of America increased its quarterly dividend by 5% to 22 cents per share, following the company’s 17% dividend increase in July 2021.
At the current share price, the bank offers an annual return of 2.7%.
While 2022 was a terrible year for the stock market as a whole, not all companies are in stasis. Oil producers, for example, continue to gush out profits and cash flows.
It’s not hard to see why. Although the oil business is capital intensive, it tends to do very well during periods of high inflation.
Buffett has no intention of missing this opportunity. One of its big moves in 2022 is loading Chevron (NYSE: CVX). In fact, the company now represents the third largest public holding in Berkshire, accounting for 9.1%.
For Q3, Chevron reported earnings of $11.2 billion, representing an 84% increase over the same period last year. Sales and other operating revenue totaled $64 billion for the quarter, up 49% year-over-year.
In January, Chevron’s board of directors approved a 6% increase in the quarterly dividend rate to $1.42 per share. This gives the company an annual dividend yield of 3.3%.
The stock also enjoyed a nice rally, rising 44% in 2022.