It has been one of the toughest years on record for Wall Street and everyday investors. The first half return for the benchmark index S&P500 was its worst in several generations, while growth centered Nasdaq Compound lose a third of its value at its peak.
While historic declines can be frightening and no doubt have investors questioning their resolve, now is a great time for long-term investors to put their money to work on Wall Street. In the long run, every double-digit decline in major indexes was eventually erased by a bull market. In other words, the current bear market decline is not a matter of if you should buy; it’s just a matter of deciding What to buy.
Currently, there are a number of highly profitable and proven companies that remain inexpensive and have the ability to enrich long-term investors. Here are four of the best proven stocks that can help you build generational wealth.
The first proven company with an impeccable track record of topping the S&P 500 and delivering massive gains for patient investors is a conglomerate Berkshire Hathaway (BRK.A 1.66%) (BRK.B 1.71%).
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 on his company’s Class A shares of 20.1% (compared to 10.5% for the S&P 500), which equates to an overall return of 3,641,613% until December 31, 2021.
One of the main reasons for Berkshire Hathaway’s success is Buffett’s focus on cyclical businesses. A “cyclical” stock is a business that fluctuates with the US or global economy. Although recessions are an inevitable part of the business cycle, they don’t last very long. By comparison, periods of economic expansion are usually measured in years. Instead of foolishly trying to predict when a recession will occur, the Oracle of Omaha has filled Berkshire’s portfolio with cyclical companies that will profit from these disproportionately longer periods of expansion.
Buffett is also a big fan of dividend stocks. Although Berkshire Hathaway does not pay a dividend, the company is on track to collect more than $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 proven. Additionally, dividend-paying stocks have a history of significantly outperforming non-payers over long periods of time.
Share buybacks are also a boon for Berkshire Hathaway shareholders. Buffett and his right-hand man, Charlie Munger, have repurchased $62.1 billion in Class A and B shares of their company over the past four years. For companies with stable or growing net income, regular buyouts can increase earnings per share and make a company more attractive to investors.
A second company with an incredible track record that can create generational wealth is electric utility stock. NextEra Energy (BORN 1.16%). NextEra has delivered positive total return, including dividends, to its shareholders for 19 of the past 20 years.
What makes electric utilities so profitable are their highly predictable operating models. Regardless of the performance of the US economy and stock market, homeowners and renters are not changing their electricity consumption habits much, if at all. This means that NextEra is able to accurately forecast its cash flow in any given year, which comes in handy when making capital expenditures for new infrastructure projects, acquisitions and its dividend.
But what really helps NextEra stand out from its competitors is the company’s focus on green energy. No electric utility in the United States generates more capacity from wind or solar power. The Company’s renewable energy segment plans to develop between 27,700 megawatts (MW) and 36,900 MW of wind, solar, energy storage and wind power renewal projects between 2022 and 2025. Although these investments don’t come cheap, they help to significantly reduce the company’s power generation costs and increase its compound annual growth rate to high single digits.
Another thing investors should keep in mind is that NextEra’s non-renewable utility operations are regulated by state utility commissions. This effectively means that NextEra cannot increase its customers’ rates without providing a valid reason. However, it also ensures that NextEra will not be exposed to potentially volatile wholesale pricing.
The icing on the sundae? NextEra Energy is a dividend aristocrat that has increased its base annual payout for 28 consecutive years and plans to increase its payout by approximately 10% per year until 2024.
A proven third stock that continues to win and can help patient investors build generational wealth is payment processor Visa (V 0.12%).
Similar to Berkshire Hathaway, Visa benefits from the much longer period the US economy spends expanding than contracting. While not immune to a spending slowdown during recessions, Visa has shown that it can weather these downturns with ease.
What is much more exciting for Visa is its leadership position in the United States and its international opportunities. In 2020, Visa accounted for 54% of the credit card network market share in the United States, 31 percentage points more than its nearest competitor. Of the four major processors in the United States, none increased its share after the Great Recession (2007-2009) more than Visa. In short, it pays to be the go-to payment network for merchants in the world’s largest consumer market.
But just as important is the fact that most global transactions are still done in cash. Visa has an exceptionally long track to expand its infrastructure organically in underbanked markets, such as Southeast Asia, Africa and the Middle East, or to carve its way into opportunities , just as it did with the acquisition of Visa Europe in 2016.
Need another reason to buy Visa as a long term money maker? Consider that it sticks strictly to payment processing and avoids lending altogether. If Visa were to become a lender, it would be exposed to delinquencies/loan losses during economic contractions and recessions. Since it does not lend, the company does not have to set aside money to cover losses. That’s why Visa rebounds faster than most financial stocks after a recession, and it’s a key reason for the company’s over 50% profit margin.
The fourth proven action that can help you build generational wealth is the FAANG action Alphabet (GOOGL 2.39%) (GOOG 2.36%). Alphabet is the parent company of internet search engine Google, streaming platform YouTube and home automation product developer Nest, among other brands.
For more than two decades, Google has been the backbone of the company. Over the past 24 months, Google has accounted for around 91% to 93% of the global internet search share. This real monopoly allows it, as well as its parent Alphabet, to have exceptional advertising pricing power. There’s a good reason Alphabet has grown its sales by double digits on an almost uninterrupted basis since going public (as “Google”) in 2004.
But make no mistake, Wall Street and the investment community are looking to the future. They are much more interested in what Alphabet does with its operating cash flow from Google than in Google’s long-term growth prospects.
Streaming platform YouTube, which is one of the biggest acquisitions of all time – YouTube was bought for just $1.65 billion – has become the second most visited social media site in the world. With 2.48 billion monthly active users, it’s no wonder YouTube is hitting $30 billion in annual ad revenue in 2022.
Additionally, Alphabet is investing heavily in its cloud services operations. According to Canalys estimates, Google Cloud amassed an 8% share of global cloud infrastructure spending in the first quarter. Since margins associated with cloud services are significantly higher than advertising margins, this segment is expected to play a key role in generating operating cash flow by mid-decade at the latest.
With Alphabet continually dominant and cheaper than it has ever been as a public company, now seems like the perfect time for long-term investors to pounce.