Better Buy: Starbucks vs. Netflix
These industry pioneers both present compelling investment cases.
While we all might love the idea of investing in stocks risk-free, there's no such thing as a stock that's 100% safe. Even the best companies can face unexpected trouble, and it's common for even the most stable corporations to experience significant stock price volatility. We've seen this during the COVID-19 pandemic, during which many strong companies generally considered safe have experienced dramatic drops in stock price. If you want a completely safe investment with essentially no chance that you'll lose money, Treasury securities or CDs may be your best bet.
That said, some stocks are significantly safer than others. If a company is in good financial shape, has pricing power over its rivals, and sells products that people buy even during deep recessions, it’s likely to be a relatively safe investment. Let’s take a look at how to find these types of stocks.
With the above characteristics in mind, here (in no particular order) are seven stocks or funds that should deliver strong returns over time and have low volatility:
Berkshire Hathaway (NYSE:BRK-A), (NYSE:BRK-B) is a conglomerate that owns a collection of about 60 subsidiary businesses, including household names like auto insurance giant GEICO, rail transport business BNSF, and battery manufacturer Duracell. Many (like these three) are noncyclical businesses that generally do well in any economic climate.
In addition, Berkshire owns a massive stock portfolio with large positions in Apple (NASDAQ:SBUX), Bank of America (NYSE:BAC), Coca-Cola (NYSE:KO), and many more. In a nutshell, owning Berkshire is like owning many different investments in a single stock. Most of the components were selected by CEO Warren Buffett himself, one of the greatest investors of all time.
Most people know Disney (NYSE:DIS) for its theme parks, movie franchises, and characters, but there's much more to this entertainment giant. In addition to these, Disney owns a massive cruise line, the Pixar, Marvel, and Lucasfilm movie studios, the ABC and ESPN television networks, and the Hulu, ESPN+, and Disney+ streaming services.
Its theme parks have tremendous pricing power and do well in most economic climates. Disney's movie franchises are among the most valuable in the world. And its streaming businesses are producing a large (and rapidly growing) stream of recurring revenue.
As we’ve seen in 2020, Disney hasn't been immune to the COVID-19 pandemic. The theme parks were closed for months, and will be operating at reduced capacity for the foreseeable future. Disney's cruise line remains closed, and most movie theaters are as well. But in the long term, Disney's brand and valuable intellectual property make it a safe investment.
As you may know, dividends are a good indicator of a company's stability. And what’s more, dividend-paying stocks tend to be more stable during tough times than those that don’t pay dividends.
The Vanguard High Dividend Yield ETF (NYSEMKT:VYM) is an exchange-traded fund that invests in a portfolio of stocks that pay above-average dividends. Top holdings include JPMorgan Chase (NYSE:JPM), Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), and AT&T (NYSE:T), but the fund invests in nearly 400 stocks altogether.
Procter & Gamble (NYSE:PG) is a mainly noncyclical business that makes products people need in any economic environment. P&G is the parent company behind household staples brands such as Pampers, Downy, Tide, Charmin, Gillette, Old Spice, and Febreze, just to name a few.
To give you an idea of how steady and consistent Procter & Gamble's business has been over time, consider that the company has increased its dividend for 63 consecutive years. That’s one of the best dividend histories in the entire stock market.
Real estate is an example of an asset that tends to produce excellent long-term growth without too much risk, and real estate investment trusts, or REITs, allow investors to get exposure to commercial properties like office buildings, malls, and apartment buildings in their portfolio.
The Vanguard Real Estate Index Fund (NYSEMKT:VNQ) invests in a diverse variety of real estate stocks, pays an above-average dividend yield, and could be a lower-risk but high-potential long-term investment opportunity.
In 2020, real estate was one of sectors hit hardest by the pandemic -- simply because many of the underlying properties owned by REITs are leased to businesses that depend on people being able and willing to physically go to them. But the long-term investment thesis is sound, and the safety of real estate is intact, especially when you’re investing in a diverse index fund like this.
You’d be hard-pressed to find a brand with a bigger competitive advantage than Starbucks (NASDAQ:SBUX). Its trusted brand gives the company pricing power over rivals, and its massive scale gives it efficiency advantages, too. In other words, Starbucks can charge more money while simultaneously benefiting from the cost advantages that come with being such a large company.
Starbucks continues to increase its footprint and its revenue year over year, and it's tough to imagine a world where Starbucks isn't the go-to destination for higher-end coffee drinks. Even when the COVID-19 pandemic forced Starbucks to close its inside seating areas, consumers still flocked to Starbucks drive-thru lines to pick up their favorite beverages.
Apple (NASDAQ:AAPL) has the durable advantage of both an extremely loyal customer base and an ecosystem of products designed to work best in conjunction with one another. In other words, iPhone customers tend to remain iPhone customers. People who use MacBook laptops tend to be very loyal to the brand as well, and the stay-at-home nature of the COVID-19 pandemic may serve as a catalyst for MacBook sales.
It's no secret that Apple products cost significantly more than comparably equipped phones, computers, and tablets from rivals. All this together shows that Apple's got tremendous pricing power.
While no stock is perfect, you can certainly set yourself up with a portfolio of relatively safe stocks if you incorporate a few guidelines into your stock analysis.
If safety is a priority, consider these four benchmarks:
On the other hand, there are some telltale factors that indicate a stock is a less safe investment:
If you're looking to invest in "safe stocks," the above list will get you started. But before you begin, remember these two caveats.
First, one of the best ways to make your portfolio safer is to diversify. As we’ve said, no stock is completely safe from volatility and competition, so by finding relatively safe stocks and spreading your money across a bunch of them, you're giving yourself much more of a safety net than if you just purchased one or two.
Second, the stocks mentioned here (and any others that seem safe) aren't necessarily “safe” over short periods. Even the best-run companies experience short-term price swings, and this has been especially apparent during the COVID-19 pandemic. Don't worry about stock prices over days or weeks, but keep your focus on which companies are most likely to do well over the long haul. And when it comes to safe stocks like these, short-term share price weakness can make for excellent long-term buying opportunities.
Essentially, the recipe for safe stock investing is to find stable companies, buy a bunch of them, and hold on for the long haul.
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