This has been one of the most-challenging years on record for Wall Street and everyday investors. The first-half return for the benchmark S&P 500 was its worst in multiple generations, while the growth-centric Nasdaq Composite shed a third of its value at its peak.
Although historic drawdowns can be scary, and they undoubtedly make investors question their resolve, they're the ideal time for long-term investors to put their money to work on Wall Street. Over the long run, each and every double-digit decline in the major indexes has eventually been cleared away by a bull market. In other words, the current bear market decline isn't a question of if you should buy; it's merely deciding what to buy.
At the moment, there are a number of highly profitable, time-tested companies that remain inexpensive and have the capacity to make long-term investors richer. What follows are four of the best time-tested stocks that can help you build generational wealth.
The first time-tested company with an impeccable track record of outpacing the S&P 500 and delivering massive gains to patient investors is conglomerate Berkshire Hathaway (BRK.A -0.10%) (BRK.B -0.36%).
While Berkshire isn't exactly a household name, its CEO, billionaire Warren Buffett, certainly is. Since taking the reins in 1965, Buffett has overseen an average annual return in his company's Class A shares of 20.1% (vs. 10.5% for the S&P 500), which works out to a 3,641,613% aggregate return through Dec. 31, 2021.
One of the top reasons for Berkshire Hathaway's success is Buffett's focus on cyclical businesses. A "cyclical" stock is a company that ebbs and flows with the U.S. or global economy. Even though recessions are an inevitable part of the economic cycle, they don't last very long. By comparison, periods of economic expansion are usually measured in years. Instead of foolishly trying to time when a recession will occur, the Oracle of Omaha has packed Berkshire's portfolio with cyclical businesses that'll take advantage of these disproportionately longer periods of expansion.
Buffett is also a big fan of dividend stocks. Although Berkshire Hathaway doesn't pay a dividend, the company is on track to collect well over $6 billion in dividend income over the next 12 months. More than $4.2 billion of this passive income is expected to come from just a few holdings. Companies that pay a regular dividend are almost always profitable and time-tested. What's more, dividend stocks have a history of vastly outperforming non-payers over long periods.
Share buybacks are a boon for Berkshire Hathaway shareholders as well. Buffett and his right-hand man, Charlie Munger, have repurchased $62.1 billion of their company's Class A and B shares over the past four years. For companies with steady or growing net income, steady buybacks can boost earnings per share and make a company appear more fundamentally attractive to investors.
A second company with an incredible track record that can build generational wealth is electric utility stock NextEra Energy (NEE 1.01%). NextEra has delivered a positive total return, including dividends, to its shareholders in 19 of the past 20 years.
What makes electric utilities such moneymakers are their highly predictable operating models. No matter how well or poorly the U.S. economy and stock market perform, homeowners and renters don't alter their electricity consumption habits much, if at all. This means NextEra is able to accurately forecast its cash flow in a given year, which comes in handy when outlaying capital for new infrastructure projects, acquisitions, and its dividend.
But what really helps NextEra stand apart from its competition is the company's green-energy focus. No electric utility in the U.S. is generating more capacity from wind or solar power. The company's renewable-energy segment anticipates developing between 27,700 megawatts (MW) and 36,900 MW of wind, solar, energy storage, and wind repowering projects between 2022 and 2025. While these investments aren't cheap, they're helping to significantly lower the company's electricity generation costs and increase its compound annual growth rate to the high single digits.
Something else for investors to keep in mind is that NextEra's non-renewable-powered utility operations are regulated by state public utility commissions. This effectively means NextEra can't raise rates on its customers without providing a valid reason. However, it also ensures that NextEra won't be exposed to potentially volatile wholesale pricing.
The icing on the sundae? NextEra Energy is a Dividend Aristocrat that's increased its base annual payout for 28 consecutive years and plans to boost its payout by roughly 10% a year through 2024.
A third time-tested stock that keeps on winning and can help patient investors build generational wealth is payment processor Visa (V -0.47%).
Similar to Berkshire Hathaway, Visa benefits from the substantially longer time frame the U.S. economy spends expanding than contracting. Though it's not immune from spending slowdowns during recessions, Visa has shown it can navigate these downturns with ease.
What's far more exciting for Visa is its leading position within the U.S. and its international opportunity. As of 2020, Visa accounted for 54% of U.S. credit card network market share, which was 31 percentage points higher than its closest competitor. Among the four major processors in the U.S., none increased their share after the Great Recession (2007-2009) more than Visa. In short, it pays to the be the go-to payment network for merchants in the largest market for consumption in the world.
But equally important is the fact that most global transactions are still being conducted in cash. Visa has an exceptionally long runway to expand its infrastructure organically into underbanked markets, such as Southeastern Asia, Africa, and the Middle East, or to acquire its way into opportunities, just as it did with the Visa Europe buyout in 2016.
Need another reason to buy Visa as a long-term moneymaker? Consider that it strictly sticks to payment processing and avoids lending entirely. If Visa were to become a lender, it would be exposed to loan delinquencies/losses during economic contractions and recessions. Since it doesn't lend, the company doesn't have to set cash aside to cover losses. This is why Visa bounces back faster than most financial stocks following a recession, and it's a key reason behind the company's greater than 50% profit margin.
The fourth time-tested stock that can help you build generational wealth is FAANG stock Alphabet (GOOGL 0.58%) (GOOG 0.41%). Alphabet is the parent company of internet search engine Google, streaming platform YouTube, and home automation products developer Nest, among other brands.
For more than two decades, Google has been the company's backbone. Over the past 24 months, Google has accounted for roughly 91% to 93% of global internet search share. This veritable monopoly allows it and parent Alphabet to command exceptional ad-pricing power. There's a good reason Alphabet has grown its sales by a double-digit percentage on an almost uninterrupted basis since its initial public offering (when it was known as "Google") in 2004.
But make no mistake about it, Wall Street and the investment community are forward-looking. They're far more interested in what Alphabet is doing with its operating cash flow from Google than Google's long-term growth prospects.
Streaming platform YouTube, which is one of the greatest acquisitions of all-time -- YouTube was purchased for a mere $1.65 billion -- has grown into the second most-visited social media site in the world. With 2.48 billion monthly active users, it's no wonder YouTube has a shot at $30 billion in annual ad revenue in 2022.
Furthermore, Alphabet is investing heavily in its cloud-service operations. According to estimates from Canalys, Google Cloud amassed an 8% share of global cloud infrastructure spending in the first quarter. Because the margins associated with cloud services are considerably higher than advertising margins, this segment should play a key role in operating cash flow generation by no later than mid-decade.
With Alphabet continually dominant and cheaper than it's ever been as a public company, now looks like the perfect time for long-term investors to pounce.