When the curtain eventually closes on 2020, you might be able to hear the collective sigh of relief from investors around the world. This has been a year no one will soon forget, with investors navigating through the fastest bear-market decline in history, as well as the strongest quarterly rally since 1998.
This record-breaking volatility has actually been one heck of an opportunity for long-term investors, as it's given them the chance to buy into game-changing businesses on the cheap. After all, every stock market correction in history has eventually been erased by a bull-market rally.
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However, this off-the-scale volatility has also led to a collective of short-term-focused investors commonly referred to as the "Robinhood trader."
Robinhood is an online investing platform that's been particularly good at attracting novice and/or young investors. The fact that an investing platform is getting young people to put their money to work in the stock market is a great thing. The issue is that Robinhood isn't giving these retail investors the knowledge and tools they need to invest wisely. As a result, Robinhood's leaderboard (i.e., the most commonly held stocks by members) looks like a mishmash of the day's hottest and most volatile penny stocks, rather than top-tier long-term investing ideas.
But among this sea of awful stocks that are probably best left avoided, Robinhood investors have also piled into three highly reputable brand-name companies that would actually be smart additions to the portfolios of retirees. We may not think of looking to Robinhood for investing ideas, but with the following three stocks, Robinhood investors have it right.
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Apple
First up is a stock that seniors can pretty much set in their portfolios and not worry about: tech kingpin Apple (AAPL 1.27%). On Robinhood, Apple is the fourth-most-held stock (612,000 members), with the number of members holding Apple's stock having tripled since November.
The beauty of Apple's business model is that it's highly predictable, which is the direct result of the company's superior branding and marketing. Apple has a very loyal following for its iPhone, and has successfully used other products in its portfolio to bring new consumers into its ecosystem, as well as keep existing customers from leaving. There's a reason the iPhone is the most dominant smartphone in the United States.
But Apple is no longer just a smartphone, Mac, or tablet company. In recent years, CEO Tim Cook has strived to push Apple into higher-margin technologies and services. This has given rise to a host of wearables, accessories, and numerous services, including streaming content and music. Both wearables and services are growing by a double-digit percentage (15% and 17%, respectively, in the quarter that ended in June), and they'll help level out the ebbs and flows that typically accompany Apple's technology replacement cycles for its iPhone.
Retirees are also going to appreciate Apple's bountiful capital return program. Sure, its yield of 0.8% might be nothing special, but that's only because Apple's share price has more than doubled over the past year. On a nominal basis, Apple has one of the largest dividends in the world. And its board has approved very aggressive and large share repurchases, which tend to have a positive impact on valuation, more often than not.
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Bank of America
Another great company that's really popular on Robinhood and should serve retirees well is money-center giant Bank of America (BAC -0.13%). On Robinhood, BofA is the 16th-most-held stock, with more than 350,000 members owning a stake. That figure has tripled since late February.
Like most bank stocks, Bank of America is a cyclical company tied to the well-being of the U.S. economy. This means when recessions strike, it's likely to see its net interest income decline as the Federal Reserve reduces lending rates, and it'll probably see delinquency rates for mortgages, auto, and personal loans increase. BofA has seen this before and navigated its way through numerous recessions.
What you might not realize is that today's Bank of America is a shell of its former self. It's arguably better capitalized than it's ever been, and happens to be the most interest-sensitive of the big banks. This means when interest rates do inevitably begin ticking higher again in 2023 (most likely), BofA will see the biggest uptick in interest income among money-center banks.
Furthermore, Bank of America has done a great job of controlling its noninterest expenses without sacrificing new customer growth over the past decade. We've witnessed more of its retail customers using digital banking or mobile apps, which has allowed BofA to close down some of its less-profitable branches. As a reminder, digital and mobile transactions cost just a fraction of in-person retail transactions.
Seniors will also be big fans of BofA's capital return plans during periods of economic expansion. If not for the coronavirus disease 2019 (COVID-19) pandemic, Bank of America would have returned some $37 billion to shareholders via share buybacks and its dividend between July 2019 and June 2020. Though buybacks have been suspended for now, BofA's yield remains firmly in place and is nearing 3%.
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Microsoft
Finally, retirees should consider following Robinhood investors into software behemoth Microsoft (MSFT 0.37%). Despite lacking in volatility, Microsoft has worked its way to become the seventh-most-held stock on Robinhood, with close to 579,000 members holding a claim.
One of the lesser-known selling points of owning Microsoft is that it truly is one of the safest stocks on the planet. According to Standard & Poor's credit ratings, Microsoft is one of only two remaining publicly traded companies with the highly coveted AAA credit rating. This means S&P has more faith in Microsoft repaying its outstanding debts than it does of the U.S. government making good on its own outstanding debt. With $54 billion in net cash and nearly $61 billion in operating cash flow over the trailing 12-month period, there's never a reason to lose sleep while owning Microsoft.
Investors can also appreciate Microsoft's innovation. In particular, its push into cloud services through Azure, and with its existing platforms, such as Windows, Office, and Dynamics, has often yielded double-digit year-on-year sales growth. In Microsoft's June-ended quarter, Azure delivered 50% constant currency sales growth from the prior-year period, and this was with COVID-19 decimating the U.S. and global economy.
Ultimately, what's great about Microsoft is its combination of exceptional branding and high-margin market share dominance. Let's face it, Windows and Office aren't the growth engines they once were -- but they're still dominant on PCs and responsible for highly predictable cash flow.
As the icing on the cake, Microsoft pays out the largest dividend of any public company in the United States. Even though it's only yielding shareholders 1%, make no mistake that this company is rewarding its investors big-time.
