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The 2 Best Buffett Stocks for Retirees

By Matthew Frankel, CFP® and Rich Smith - Updated Oct 3, 2017 at 1:39PM

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Here are two stocks that meet most of Warren Buffett's stock-picking criteria.

When Warren Buffett evaluates stocks, he looks for several things that are also important to retirees. For example, Buffett looks for businesses that work in any economic climate, sport strong balance sheets, and have durable competitive advantages, just to name a few things.

Here are two stocks our investors think you should take a look at -- one that's a member of Berkshire Hathaway's (BRK.A 0.03%) (BRK.B 0.00%) stock portfolio, and another that simply has a lot of Buffett-like qualities: Store Capital (STOR -0.14%) and H&R Block (HRB 0.08%).

Warren Buffett speaking to the media.

Image source: The Motley Fool.

Steady, predictable income and lots of room to grow

Matt Frankel (Store Capital): My favorite Buffett stock for retirees happens to be one of the newest additions to Berkshire's portfolio -- Store Capital, a net-lease real estate investment trust with 1,750 properties.

Most of Store Capital's properties are retail- or service-oriented, and thanks to e-commerce headwinds in the retail sector, the stock has dropped by 14% over the past year, even after the post-Buffett rally. However, Store's properties are largely immune to e-commerce competition thanks to the non-discretionary, experience-based, or service-based nature of the tenants. To name a few examples, Store Capital's top tenants include ­­AMC Theaters, Gander Mountain, Applebee's, and Camping World.

Store's net lease structure is what makes the stock so appealing for retirees looking for predictable, growing income. Tenants sign long-term leases (the average is 14 years) and are responsible for property taxes, building insurance, and certain maintenance expenses. In other words, Store Capital's uncertain expenses are the responsibility of the tenant. Not only that, but there are also generally annual rent increases, or escalators, built right in to the lease, with an average increase of 1.8% per year.

For income-seeking retirees, Store Capital pays a 4.6% dividend yield based on its current stock price and has a good record of increasing the payout. As far as growth goes, the company sees tremendous room for expansion. Since its inception, Store Capital has grown by an average of 76 properties per quarter, and with an estimated investable market of $2.6 trillion, there's no reason to believe this trend will slow down anytime soon.

Things that are sure in life: Death, taxes, and H&R Block stock

Rich Smith: (H&R Block): What should a retiree look for in a stock? How about a company with a recognized brand name to differentiate it from the competition, a "tollbooth" business like those that Buffett prefers -- and a nice above-market-average dividend yield, to help pay the mortgage on the vacation home?

How about a stock like H&R Block?

H&R Block's name is practically synonymous with the concept of filing income taxes -- something all of us must do. That's the very definition of a tollbooth business. And as you'd expect, business is good, with H&R Block's revenue up 10% in the most recent quarter. More surprising is that H&R Block, whose strength has traditionally been in the field of in-person tax-preparation help, is gaining greater traction in do-it-yourself tax-filing software. In the 2017 tax filing season, as archrival Intuit's market share stagnated, H&R Block boasted  that it gained market share.

That's turning out to be good news for shareholders. With a dividend yield of 3.6%, H&R Block stock already pays nearly twice the average 2% dividend yield on the S&P 500. Yet the stock's 43% dividend payout ratio suggests H&R pays this dividend with ease -- and could even pay more if it so desired -- as indeed it did desire last quarter, when it raised its dividend by 9%.

Analysts who follow H&R Block stock think the company can grow its earnings 10% annually over the next five years. So long as the U.S. government wants people to keep paying taxes, I'd say that's a safe bet to make.

Matthew Frankel owns shares of Berkshire Hathaway (B shares). Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Intuit. The Motley Fool recommends Camping World Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

H&R Block, Inc. Stock Quote
H&R Block, Inc.
$48.44 (0.08%) $0.04
STORE Capital Corporation Stock Quote
STORE Capital Corporation
$28.38 (-0.14%) $0.04
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$457,400.01 (0.03%) $122.52
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$304.27 (0.00%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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