Arguably, no one has done better with buy-and-hold investing than Warren Buffett. In a span of more than six decades, the Oracle of Omaha has transformed less than $10,000 into a fortune of more than $80 billion. But the best part about Buffett's strategy, which involves buying high-quality companies and hanging onto them for the long run, is that it can work for you, too.
Buffett's investing style can be particularly helpful to retirees, who are often looking to invest in stocks that provide income and stability. So what are the best Buffett stocks that a retiree can consider buying today? We posed this question to three of our investors, and they chose Visa (NYSE: V), Bank of New York Mellon (NYSE: BK), and Kraft Heinz Company (NASDAQ: KHC).
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This company keeps charging higher
Sean Williams (Visa): Even though payment processing facilitator Visa has a yield that some retirees might frown upon (0.6%), Warren Buffett's love for this payment giant makes a lot of sense.
Perhaps the best selling point of Visa is that its business model works in just about any economic environment. Visa isn't a lender like some of its peers, meaning that while it can't double-dip and make money from both transaction fees and interest in good economic times, it's also fully protected from delinquencies during economic contractions and recessions. Operating in more than 200 countries worldwide, Visa is able to take advantage of high growth in emerging markets, while also furthering entrenching itself in the developed countries that form its foundation.
Within the U.S., Visa is undeniably king. As of 2016, Visa's market share of the credit card market was 50.6%, which is more than double its next-closest competitor, American Express (22.9%). Having the most market share by a mile in the U.S., a country that generates 70% of its GDP from consumption, means that Visa is a go-to payment facilitator for merchants.
There's also a relatively high barrier to entry in payment processing. Though we've seen new peer-to-peer payment platforms take shape in recent years, it takes a lot of money to pay for the infrastructure needed to lay the groundwork for a payment network. There are also intangibles, such as taking years to build rapport with merchants, which make it tough for new players to succeed. Visa has just a small handful of serious competitors, and the high barrier to entry in the industry keeps it firmly at the head of the pack.
With plenty of organic expansion opportunities in Africa, Southeast Asia, and the Middle East, along with inorganic growth opportunities (e.g., its 2016 acquisition of Visa Europe), Visa looks to be unstoppable. Something tells me that retirees can overlook at 0.6% yield if Visa's stock continues to rise by a double-digit percentage every year.
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A bank without the banking risk
Jordan Wathen (Bank of New York Mellon Corp.): Though it may technically be a bank, Bank of New York Mellon is perhaps the least bank-like of any publicly traded banking institution. It makes very few loans, takes very little in deposits, and doesn't have a need to open up branches to serve its customers.
Bank of New York Mellon primarily operates as a custodian bank and wealth manager that holds assets on behalf of major institutional investors. This simple business model is highly profitable and predictable. Fees make up about 80% of its revenue, whereas even the best traditional deposit-gathering institutions are lucky to generate half their revenue from fees.
Scale is the name of the game in custody and basic asset management services. As a custodian of more than $30 trillion of client assets, it's less expensive and more convenient for asset managers to hire Bank of New York Mellon than it is for the same asset managers to build their own custody departments on their own. Scale is likely why Buffett, one of the best bank stock investors ever, holds Bank of New York Mellon shares in Berkshire Hathway's portfolio.
Of course, given the minimal risk of outsize losses due to a small, high-quality lending operation, shares of Bank of New York Mellon rarely trade inexpensively (the stock presently trades at about 3.5 times tangible book value). But given its focus on services, rather than balance-sheet-driven businesses like lending, it's my view that the bank is best valued based on a multiple of its earnings power rather than a multiple of its equity. At about 16 times earnings, investors are getting a very fair price for a bank stock they don't have to babysit.
Image source: Kraft Heinz.
One of Buffett's favorites
Keith Noonan (Kraft Heinz): Retirees looking for a "set it and forget it" stock in the Buffett mold of investing should have Kraft Heinz near the top of their buy lists.
The company is backed by a stable of strong products, with eight individual brands that generate more than $1 billion in annual retail sales, and has global distribution advantages that further contribute to the type of competitive moat that the Oracle of Omaha typically looks for when buying stocks.
Buffett himself also clearly has big confidence in the company. In addition to helping broker the deal to merge Kraft and Heinz in 2015, Berkshire is the food company's biggest shareholder. As of June 30, Buffett's investment company owned a roughly 27% stake in Kraft Heinz, and the famous investor has been looking for potential acquisitions to expand the company's reach, create synergies, and push it into new product categories.
With a 3.2% dividend yield, Kraft Heinz stock also packs a returned income component that makes it a great fit for retirement portfolios. The company has only a three-year history of annual payout increases, but that's due to the merger of the Kraft and Heinz businesses being a relatively recent affair, and it looks like investors can continue to expect regular payout growth.
Shares of Kraft Heinz currently trade at 52-week lows due to slowing sales and acquisitions-related disappointments, but the pullback could present retirees with a good entry point. The stock still doesn't look super cheap at 21 times forward earnings, but it meets Buffett's criteria of being a great company at a fair price and looks primed to be a strong long-term performer.
Jordan Wathen has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends BRK-B and Visa. The Motley Fool recommends AXP. The Motley Fool has a disclosure policy.