The best stock for retirees may not be what you think.
Articles on retirement investing often focus on dividend stocks, and rightfully so: Reliable dividend payers can help provide retirees a steady stream of income. But as renowned investor Warren Buffett pointed out in his 2012 annual letter, shareholders can create their own cash streams simply by selling off some of the shares they own over time. For businesses that can reinvest their earnings at high rates of return, this strategy can help to generate greater overall profits for shareholders. It's in this regard that I urge investors to consider the following excellent -- if non-dividend paying -- stock for their retirement portfolios.
Image source: The Motley Fool.
Buffett's masterpiece
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is an incredible collection of high-quality businesses meticulously assembled by legendary investor Warren Buffett during his more than 50 years at the company's helm. These businesses span many areas of the global economy, including insurance, utilities, railroads, retail, and manufacturing.
It's this broad diversification that helps to lessen Berkshire's risk profile -- an important aspect of a great retirement stock. It also provides many different areas in which the company can reinvest its ever-growing cash flows, making it easier to earn attractive rates of return. In turn, this ability to successfully reinvest retained earnings has forged Berkshire Hathaway into a powerful compounding machine, one that snowballs its investors' wealth steadily -- and exponentially -- over time.
In addition to its wholly-owned subsidiaries, Berkshire also invests in publicly traded companies. Buffett and his two trusted investing lieutenants, Ted Weschler and Todd Combs, manage an equity portfolio valued at more than $137 billion (as of the end of the second quarter), comprised of some of the most competitively advantaged businesses available in the public markets. Together with Berkshire's operating subsidiaries, the performance of these investments has helped to grow the company's book value per share by an incredible 19% annually over the past 52 years.
Yet despite both its internal and external investment opportunities, Berkshire is so profitable that its cash hoard has ballooned to nearly $100 billion. This helps to further lower Berkshire's risk profile, as the company's cash reserves can cover any claims its insurance operations may need to pay out many times over. It also gives the world's best investor plenty of dry powder to use when opportunities arise. This makes Berkshire a strong all-weather business, as it tends to benefit from economic downturns by being able to scoop up new businesses on the cheap. Retirees can count on Berkshire to hold up relatively well during periods of market distress.
All told, Berkshire Hathaway is considered by many to be the crown jewel of American business. It's one of the strongest, safest, and most consistently successful companies in the world. Shares can currently be had for about 1.5 times book value -- a fair price to pay for a business of such exceptional quality. Therefore, retirees may wish to consider adding some shares of Berkshire Hathaway to their diversified investment portfolios.
