Quality and durability should be the two pillars of any retiree's stock portfolio. A company that has a long track record of success and a bright future thanks to durable competitive advantages is the ideal candidate for inclusion.
Warren Buffett is known for seeking these types of companies, holding shares for decades and letting the power of compounding work its magic. We asked three of our Foolish investors to each detail a Buffett-style stock that would be a great fit for retirees. Here's why Kinder Morgan (KMI -1.56%), Kraft Heinz (KHC 0.77%), and Johnson & Johnson (JNJ -2.13%) are great options.
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This toll booth business once wowed Warren
Rich Smith: (Kinder Morgan): What should a retiree look for in a stock? How about a company with a huge moat to protect it from competition, a "toll booth" business like the kinds that Warren Buffett prefers -- and a nice above-market-average dividend yield, to help pay the mortgage on the vacation home?
How about ... a stock like Kinder Morgan?
Kinder Morgan is a giant in the U.S. energy industry, running 84,000 miles of pipelines to transport everything from petroleum to gas to chemicals hither and yon, all across the country. As moats go, this one's hard to beat. It's taken Kinder Morgan 80 years to put together this network of pipes under its control. One imagines it would take any would-be rival a similar eight decades before it could match Kinder.
If you want to move petroleum products in the U.S., it's hard to get around using Kinder Morgan's network and paying the fee for admission. Charging fees based on the volume of product flowing through its pipes, Kinder Morgan doesn't have to worry overmuch about how much a barrel of oil is selling for these days. It just collects its fee and helps the product move along.
As for its dividend, Kinder just announced a 60% increase in its payout for 2018. At $0.50 per share, per year, Kinder Morgan now pays a dividend yield of 2.5%, which is 21% better than the average dividend yield on the S&P 500 -- and Kinder is promising to grow that dividend by 25% a year every year through at least 2020. I think this all makes Kinder a fine "Buffett stock" for retirees to own.
The power of brands
Tim Green (Kraft Heinz): Buffett's love of strong, durable brands is evident in Berkshire Hathaway's massive $28 billion stake in food giant Kraft Heinz. For retirees looking for a stable company to buy and forget, Kraft Heinz is a good choice.
Beyond the namesake Kraft and Heinz brands, Kraft Heinz sells products under the Oscar Mayer, Kool-Aid, Jell-O, Philadelphia, Planters, and Maxwell House brands, to name just a few. Many of the company's brands have been around for decades, and further acquisitions in the coming years, possibly even beyond the food business, could expand the company's portfolio further.
Kraft Heinz stock is not cheap, trading at around 28 times earnings. But that's the price you pay for quality in an expensive market. Despite the high price, the dividend is attractive, yielding about 2.75%, well above the meager 1.9% yield of the S&P 500. For retirees looking for income, Kraft Heinz delivers.
The biggest risk facing Kraft Heinz is also its biggest advantage. While many of its brands are iconic, the company risks those brands becoming stale and unappealing, especially among consumers trending toward natural and organic products. Kraft Heinz will need to adapt – or make acquisitions that freshen its portfolio – in order to keep up.
Buffett's seal of approval is not something to ignore, and it should give retirees confidence in the company despite that risk. A vast stable of well-known brands and Buffett's blessing make Kraft Heinz an ideal Buffett stock for retirees.
A cut above
George Budwell (Johnson & Johnson): Because of their fairly weak economic moats, healthcare companies aren't a favored investing vehicle for super-investor Warren Buffett, and his diversified holding company Berkshire Hathaway. Most healthcare companies, after all, rely heavily on time-limited patent portfolios to fend off would-be competitors, and that's a huge red flag for a defensively oriented investor like Buffett.
Even so, Berkshire Hathaway has, in fact, owned shares of the diversified healthcare giant Johnson & Johnson since the first quarter of 2006. While the reason behind Berkshire's decision to make J&J one of its few healthcare holdings isn't public knowledge, the company's top notch innovation engine and superb M&A history are likely key factors.
Long story short, J&J has used these key business development activities to astonishing effect to offset the declining revenues of blockbuster products coming off of patent protection, or facing new competitive threats. In fact, the healthcare giant is forecasting that its current clinical pipeline of internal and external candidates should produce somewhere around ten new blockbuster medicines within the next three to four years.
The take home message is that J&J has been able to effectively blunt the threat of generic competition by continually refreshing its product portfolio -- reflecting the company's unparalleled ability to successfully develop internal candidates, as well as bring in promising external candidates to round out its pipeline. And as a direct result of its clinical prowess, J&J's stock has consistently outperformed most major indices over the past two decades, arguably making it one of Buffett's best picks of all time.
