Wall Street is known for testing the resolve of investors from time to time. The dot-com bubble, financial crisis, brief coronavirus crash, and now the current bear market, which has recently given way to regional bank turmoil, are all examples of investors having their investment theses tested.
For some investors, volatility simply isn't palatable. However, it doesn't mean these conservative investors have to head to the sideline when uncertainty strikes. Rather, it means sticking to low-volatility, profitable, time-tested businesses that have a history of delivering for their shareholders.
Image source: Getty Images.
If safe stocks are what you seek, the following three exceptionally safe stocks are well-positioned to grow an initial investment of $400,000 into $1 million -- a 150% total return, including dividends paid – by the end of 2030.
Enterprise Products Partners
The first safe stock primed to deliver for its long-term shareholders is oil and gas company Enterprise Products Partners (EPD 1.12%).
Seeing "oil and gas" in the same sentence as "safe stock" might be a bit shocking. Just three years ago, a historic demand slowdown in energy commodities that was tied to initial COVID-19 lockdowns briefly sent West Texas Intermediate crude oil futures plummeting to negative $40 per barrel. Anyone who was invested in drilling companies definitely felt the pain and uncertainty of weaker crude oil and natural gas prices for a couple of quarters.
However, Enterprise Products Partners isn't a driller. It's one of the nation's largest midstream oil and gas operators. As an energy middleman, it operates more than 50,000 miles of transmission pipelines, nearly 30 natural gas processing plants, and can store approximately 260 million barrels of oil, natural gas liquids, and refined products, along with 14 billion cubic feet of natural gas.
The key advantage Enterprise offers is the structure of its contracts with drilling companies. Approximately three-quarters of its gross operating margin in 2022 was the result of fee-based contracts. This type of contract completely removes inflation and spot-price volatility from the equation.
Equally important, the cash-flow predictability from fee-based contracts allows Enterprise's management team to set aside capital for new and existing projects, as well as the company's quarterly distribution, without adversely impacting profits. Enterprise Products Partners has a dozen major projects, with an aggregate cost of $5.8 billion, set to come online by no later than the first-half of 2025.
What investors are going to appreciate is Enterprise Products Partners' distribution. This is a company that's raised its payout for 24 consecutive years and is currently yielding 7.7%. At no time during the COVID-19 pandemic was the company's payout remotely close to being reduced.
Lastly, there's a good chance Enterprise will benefit from the globally broken energy supply chain. Years of underinvestment tied to the pandemic, coupled with Russia's invasion of Ukraine, sets the stage for sustainably higher oil prices. If oil remains above its historic average, Enterprise should have the opportunity to secure additional transmission, storage, and processing contracts as drillers look to capitalize.
Walgreens Boots Alliance
A second exceptionally safe stock that's fully capable of turning a $400,000 initial investment into $1 million by 2030, including dividends paid, is pharmacy chain Walgreens Boots Alliance (WBA 1.10%).
Let's address the elephant in the room: Walgreens' five-year stock chart doesn't look pretty. Much of this decline has to do with the company getting hurt, financially, by the pandemic. While healthcare stocks are usually (pardon the pun) immune to economic downturns since people can't control when they become ill, Walgreens is highly dependent on foot traffic into its stores. When lockdowns kept people in their homes, all facets of Walgreens' business suffered.
But sometimes a good kick in the pants serves as a wake-up call for management. That's precisely what happened for Walgreens Boots Alliance, which is multiple years into a business transformation focused on raising its operating margin, boosting its organic growth rate, and increasing customer loyalty/visits.
Yes, Walgreens has been cutting costs like most big businesses. It shed more than $2 billion in annual operating expenses as of the end of fiscal 2021. But cost-cutting is an operating margin Band-Aid. What's far more important is where Walgreens is putting money to work.
After years of growing horizontally and adding more stores, Walgreens is shaking things up via its VillageMD partnership. The two companies have, to date, opened 200 physician-staffed, full-service health clinics co-located in Walgreens' stores. Whereas most pharmacies in grocery stores and even pharmacy chains can only handle simple vaccines, the clinics Walgreens is fostering in its stores are designed to draw repeat visitors. The plan is to have 1,000 of these clinics open by the end of 2027. A revenue stream that's more reliant on healthcare services should lift the company's organic growth rate.
To add, Walgreens is investing in a variety of digitization initiatives. This includes streamlining its supply chain, as well as building out its direct-to-consumer solutions. Although digital sales will never be a large percentage of revenue for Walgreens, the convenience of online sales is, nevertheless, an easy source of organic growth potential.
Walgreens Boots Alliance has increased its base annual dividend for 47 consecutive years, and its shares are currently yielding 5.7%. With a forward-year price-to-earnings ratio of just 7, a strong argument can be made that the reward for patient investors heavily outweighs any risk.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Berkshire Hathaway
When the going gets tough, the tough ride Berkshire Hathaway (BRK.A 0.72%) (BRK.B 0.51%) CEO Warren Buffett's coattails!
If you're an investor, there's a good chance your brokerage, financial advisor, mutual fund, 401(k), or other financial service has told you, in one way or another that, "past performance is no guarantee of future results." Although Warren Buffett isn't infallible, he's certainly been unstoppable over long periods as CEO.
Since taking over in 1965, the Oracle of Omaha has led his company's Class A shares (BRK.A) to an annualized return of 19.8%. That's double the annualized total return, including dividends, of the S&P 500 (9.9%) over the same time frame. Perhaps even more impressive, Berkshire's aggregate return of 3,787,464% is 153 times greater than the S&P 500's 24,708% total return since he took the reins.
While there's a long list of reasons for Buffett's ongoing success, Berkshire Hathaway's outperformance, and the reason it's an exceptionally safe stock, can be boiled down to three key factors.
To begin with, Warren Buffett and his investing lieutenants, Todd Combs and Ted Weschler, tend to invest in and acquire cyclical businesses. Since World War II, recessions have lasted anywhere from two months to 18 months, according to the National Bureau of Economic Research. Comparatively, periods of expansion are measured in years. The Oracle of Omaha is playing a simple numbers game that allows his company to take advantage of these long-winded periods of expansion without having to time the market.
The second catalyst for Berkshire Hathaway is the favorability shown toward dividend stocks. Buffett's company is on track to collect more than $6 billion in dividend income in 2023. Publicly traded companies that pay a dividend are usually profitable and time-tested. Of note, income stocks have historically outperformed non-dividend payers over long periods, too.
And third, Berkshire Hathaway's capital-return program is a positive for its shareholders. Since Berkshire's board amended the criteria for share buybacks in July 2018, Buffett and his right-hand man Charlie Munger have green-lit the repurchase of $66 billion of Berkshire Hathaway stock. For companies with steadily growing net income, a declining outstanding share count can lift earnings per share and make it appear even more attractive to fundamentally focused investors.
Even if Berkshire Hathaway stock isn't able to sustain its historic 19.8% annualized return rate through 2030, it's proved to be a company that can, pretty consistently, outperform the broader market.
