If you have a long time horizon to invest, you can see incredible gains with even a low starting sum. The best way to increase your gains is to add over time and let the magic of compounding do its job.
Investing legend Warren Buffett is a big proponent of holding for the long term and has famously said that his favorite holding period is forever. If you would have invested $1,000 in his holding company, Berkshire Hathaway, 30 years ago, even with no addition, you'd have more than $30,000 today.
You can still invest in Berkshire Hathaway today and likely watch your money grow. You can also choose Buffett stocks that work for your individual portfolio needs. Apple (AAPL -0.35%), Coca-Cola (KO), American Express (AXP -0.62%), and Bank of America (BAC -0.21%) are four top picks.
1. Apple: Buffett's largest position
Berkshire Hathaway owns more Apple stock than any other, by far. Apple accounts for more than 48% of its equity portfolio.
Buffett doesn't love tech stocks, but Apple can be viewed as a consumer electronics company with an incredible moat in its high-innovation ecosystem that generates loyalty and sales. When customers buy an iPhone or a Mac, they often end up buying other Apple products, which work well together and often address pain points with other consumer tech products. This has expanded from smartphones and laptops into iPads, iPods, smart watches, and more, creating a cadre of Apple customers who often line up to buy the newest iterations of favored products.
On top of that, it has created an entire suite of high-margin services available throughout its ecosystem that support consumer loyalty and drive higher sales and profits. These are things like Apple Pay, which has become a popular digital payments service, and iCloud storage solutions. In fact, although total revenue declined slightly by 1% in the 2023 fiscal fourth quarter (ended Sept. 30), services revenue reached an all-time high.
Apple has delighted customers who continue to engage with and purchase new products and services, and this loyal customer base should drive strong revenue growth for many years.
2. Coca-Cola: Participating in the American story
Coca-Cola is Buffett's longest-held stock. He has said that Coca-Cola, as the largest beverage company in the world, with a global, loyal fan base, should be around for decades as a company participating in the U.S. economy. He himself has said that he would never sell Coca-Cola stock.
In many ways, it's a classic Buffett stock. It has incredible cash flow, with a strong brand and excellent management. It also pays an attractive dividend, which yields 3.2% at the current price, and has demonstrated a rock-solid commitment to paying -- and raising -- the dividend under most conditions. Early in the pandemic, when sales were declining by double digits, the payout ratio -- or how much net income is devoted to the dividend -- rose above 100%. In general, though, it's around 75%. That's high, but it fits for a large, established industry giant that provides shareholder value through passive income, saving about a quarter of its cash for growth and innovations.
Coca-Cola is a Dividend King and has raised its dividend annually for the past 61 years. It's a great source of reliable passive income for value investors or those looking for a stable dividend stock in a diversified portfolio.
3. American Express: Strong relationships drive net income
American Express is another classic Buffett pick that has many of the same features as Coca-Cola. It has strong relationships with its loyal clientele, which it leverages into annual fees that support net income growth. It generates large amounts of cash, and it pays a dividend.
Although it's not as big as credit card processing network Visa, it serves a niche clientele that's affluent, resilient, and engaged. This kind of client base is able to spend more freely than the broader population and is less susceptible to changes in interest rates and inflation. What's more, they pay the annual fee regardless of how much they spend.
American Express has made several changes to its model in recent years, and I'll split them into two categories: Targeting a younger cardmember population, and expanding its services.
The pivot to a younger client cohort has been extremely successful. Millennials and Gen Z customers are the fastest-growing cohort by age group and accounted for 60% of spending in the third quarter. Their sales increased 18% year over year, outpacing overall spending growth of 7%.
As for expanding services, American Express has started to offer a large suite of small business services that add value to its merchant client base. It also offers checking and savings accounts, generating greater value from its large customer base as it cross-sells new products.
4. Bank of America: The people's bank
Buffett is known for his love of bank stocks, but he clearly likes some more than others, and he loves Bank of America. That goes back to his understanding of great stocks as those that will participate in the economy in the future. Bank of America, or BofA, is more consumer-focused than other big banks. That could be one reason Buffett sees it as having a long-term position in the American story, making it a compelling stock to own.
Bank of America has felt the effect of inflation and higher interest rates, but it's already bouncing back. Net income increased 10% year over year in Q3, with a net interest margin of 4%.
As usual, consumer banking was strong. It added 200,000 new checking accounts in Q3 2023, and 1.1 million credit cards in the consumer banking division. Consumer investment accounts increased 10% to 3.8 million. Net income fell 7% from last year in consumer banking because of rising defaults, consistent with economic trends.
That's where BofA's other segments work to pick up the slack. Its investment banking is now third-largest in the U.S. in fees, and it added 1,900 new clients in Q3. The global banking division increased net income 26% in the quarter.
Bank of America continues to engage with recruiting new customers throughout its divisions, generates lots of cash, and has a long runway in driving the U.S. economy. It also pays a dividend that yields a market-beating 3.2% at the current price.
These four stocks create the backbone of Berkshire Hathaway's $360 billion portfolio, and they can add value to an individual stock market account.
