Please ensure Javascript is enabled for purposes of website accessibility

Why Berkshire Hathaway Is a Retiree's Dream Stock

By Selena Maranjian - Mar 17, 2021 at 9:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Warren Buffett has built a unique and powerful company that can serve all kinds of investors well.

What could be more perfect as a retiree's dream stock than one run by a 90-year-old guy? I'm referring to Warren Buffett, of course, and to his company, Berkshire Hathaway (BRK.A 2.10%) (BRK.B 2.12%). Buffett is not retired, though, and is continuing to run the remarkable company he has built over more than 50 years.

Here's a closer look at Berkshire Hathaway, and why you might want to consider it for your retirement portfolio.

Warren Buffett faces the camera.

Image source: Getty Images.

Meet Berkshire Hathaway

Berkshire Hathaway is a conglomerate, though Buffett bristles a bit at that label, as many conglomerates have been formed by overpaying for companies (often with stock, diluting shareholders' stakes) that were not necessarily wonderful. Buffett is known for being rational, though, and for his discipline. He aims to never overpay, and is reluctant to pay with stock, preferring cash. (And Berkshire is usually brimming with cash.)

Businesses under Berkshire's roof number more than 60, and feature names such as Benjamin Moore, Brooks, International Dairy Queen, Johns Manville, Justin Brands, McLane, Business Wire, Clayton Homes, Forest River, Fruit of the Loom, GEICO, Nebraska Furniture Mart, NetJets, Pampered Chef, See's Candies, Shaw Industries, and the entire BNSF railroad.

Much of Berkshire Hathaway's value lies in the shares of stock it owns in other companies. Together, at the end of 2020, the shares were worth more than $280 billion. The top five holdings are below:

Company

Percentage of Company Owned

Cost at Purchase

Market Value as of Dec. 31, 2020

Apple 

5.4%

$31.1 billion

$120.4 billion

Bank of America

11.9%

$14.6 billion

$31.3 billion

Coca-Cola 

9.3%

$1.3 billion

$21.9 billion

American Express 

18.8%

$1.3 billion

$18.3 billion

Verizon Communications

3.5%

$8.7 billion

$8.6 billion

Data source: Berkshire Hathaway. 

Buffett and his two younger investing lieutenants have great track records when it comes to investing. The newish stake in Apple, for example, has quadrupled in value, delivering roughly $90 billion in value to Berkshire.

The best thing about Berkshire is its beautiful business model: Its various businesses generate a lot of cash every year, and the money is invested by great investors. Some of it goes to the more capital-intensive holdings, such as the BNSF railroad, that need cash infusions to buy more rail cars, maintain tracks, and so on. But much of it gets invested in promising stocks -- and is also used to buy great companies outright.

Meanwhile, should the economy take a downturn, Berkshire stock is likely to be more resilient than many others, as it encompasses so many essential products and services, such as insurance, energy, and underwear.

In his latest letter to shareholders, Buffett reported overall growth from the mid-1960s to 2020 of 2,810,526% -- equal to a compound annual gain of 20%. In contrast, the S&P 500 averaged 10.2% annually over that period, for a total of 23,454% growth. The company's growth rate has been slowing, overall, in recent years, as it can be hard for a huge company (recent market value: $588 billion) to double and triple in size in short order.

A highway sign says retirement next exit.

Image source: Getty Images.

Why Berkshire Hathaway is perfect for retirees (and others)

So why is Berkshire Hathaway so good for retirees? Well, the main upside it offers is stability. A key goal of many retirees is preserving capital -- you don't want your nest egg to shrink much if you're drawing from it for your income. It's true that Berkshire doesn't pay a dividend, but there may come a time, if Buffett sees dwindling compelling uses of company cash, when a dividend will be initiated. Buffett has deployed a lot of cash rewarding shareholders by repurchasing shares of Berkshire stock at favorable prices.

Anyone owning shares of Berkshire stock can expect the value of the shares to grow over time, though not at breakneck speed. There may be no dividend, but if you buy Class B shares, which are priced far lower than Class A shares, you can generate income from your Berkshire stake just by selling a few shares at a time, as needed. Or you can keep your Berkshire shares as ballast for your portfolio, selling off shares of other companies and/or enjoying income from dividend-paying stocks.

Succession plans

Given that Buffett is 90, it's worth addressing succession plans. Some investors worry about what happens when Buffett loses his sharpness and what happens when he's no longer at the helm. He has planned for it all. Company leadership (such as the board of directors) has been instructed to alert him when it's time to step aside, for starters. As for who will take his place, there's no one person to do it. His two investing lieutenants are in place to continue making investment decisions, and he has given the board of directors the name of his chosen a successor (perhaps in a sealed envelope). His son Howard will be in the mix, too, ensuring that the company maintains its productive culture.

If you're looking to fill out a stock portfolio for retirement -- or even if you're still in your 30s, 40s, or 50s -- consider adding some Berkshire stock. And by the way, the company's annual meeting, which is usually held in Omaha with tens of thousands of shareholders attending, will be held on May 1, streamed on Yahoo! due to the pandemic. Tune in: Buffett and his partner Charlie Munger typically answer questions for hours, and are both enlightening and amusing when doing so.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$319.11 (2.12%) $6.61
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$478,669.51 (2.10%) $9,864.47
Apple Inc. Stock Quote
Apple Inc.
AAPL
$149.64 (4.08%) $5.86
American Express Company Stock Quote
American Express Company
AXP
$169.60 (2.56%) $4.23
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$51.40 (0.80%) $0.41
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$37.02 (0.95%) $0.35
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$64.68 (0.59%) $0.38

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.