There’s a lot of noise in the investment world as to what makes the most sense for retirement investors. When it comes to my own portfolio, I have a certain set of standards my retirement holdings must meet.
My general take is “do no harm.” These stocks need to represent both consistency and innovation. They aren’t resting on their laurels, but growing modestly — like a Peter Lynch stalwart — and growing earnings. So make sure you have a diversified portfolio with particularly broad holdings in dividend stocks.
That being said, you also want exposure to some form of possible capital gains. There’s nothing wrong with pulling down a 2% to 5% dividend. What you must realize, however, is that real inflation may very likely be closer to 8% to 10%. A paltry dividend won’t put a dent in inflation if that’s true.
The safest means of generating capital gains is to go with conglomerates. These are often holdings companies with broadly diversified businesses under one umbrella, or one company that has its hands in multiple industries. Conglomerates often are insulated from huge declines because of their diversification. Some pay dividends, and some don’t, but all of the following are safe bets.
Conglomerates for Retirement: Liberty Media Corp (LMCA)
Liberty Media Corp (LMCA) is the constantly changing conglomerate of the legendary John Malone. He’s a master at dealmaking, a master at avoiding taxable transactions, and a master at confusing the markets by constantly shuffling his holdings into different tracking stocks.
Nevertheless, Liberty Media always has great companies in its vault. At present, these include great cash flow generators, which is what Malone always looks for. Here’s a link to all of Liberty’s holdings. You’ll note several public vehicles in there, including Time Warner Inc (TWX) and Viacom, Inc. (VIAB). Liberty also has ownership positions in two private investment vehicles, so Malone can make strategic investments in promising entities.
Conglomerates for Retirement: Berkshire Hathaway Inc. (BRK.B)
Right next to Malone is, of course, Warren Buffett’s Berkshire Hathaway Inc. (BRK.B). Here’s a link to Uncle Warren’s latest holdings.
Both Buffett and Malone operate in much the same way. They buy great businesses and leave management alone! The theory is current management got the company to where it is today, so why make a change?
The only difference is that Buffett tends to buy out entire companies. Malone has done that, too, but he will more often buy strategic stakes.
As you can see from Berkshire’s list, however, it covers just about every aspect of the American economy. You get exposure to so much, such as Heinz, See’s Candies and Lubrizol, and all of it has the solid foundation of the Geico insurance brand. Insurance is what provides much of the attention Berkshire receives because it’s such a huge part of the conglomerate. Insurance also is a historically stable business, and therefore great for retirement.
Conglomerates for Retirement: 3M Co (MMM)
Another good choice is 3M Co (MMM). As I wrote back in September, “3M is home to some 50,000 products across multiple sectors: Industrial (34% of 2013 revenues and 32% of operating profits); Safety & Graphics (18% and 18%); Healthcare (17% and 24%); Electronics & Energy (17% and 13%), and Consumer (14% and 13%).”
That’s the diversification I’m talking about.
With it comes cash flow, which is used to pay a dividend that has been increased every year over the past 25 years.
MMM stock is in similar positioning as Liberty Media. The latter invests in other innovating, cash flowing companies. 3M innovates on its own with its own R&D department, but also makes acquisitions of innovative companies.
Conglomerates for Retirement: General Electric Company (GE)
The final choice is a name you know well. General Electric Company (GE) may be the granddaddy of the conglomerate with divisions in aviation, energy, finance, healthcare, transportation and home improvement. Yet even that seems to oversimplify the sheer breadth of the company.
GE generates almost $150 billion annually in revenue. It returns much of its capital back to shareholders in the form of buybacks, which increase the value of the company by making each share worth more since there are fewer of them. It also pays a reliable dividend. In fact, the dividend is so reliable that even though it was cut by 50% in the financial crisis, it still kept paying that dividend.
I think GE is probably the most conservative choice in the group, followed by Berkshire as the next most risky — which is to say, it isn’t very risky at all. 3M probably is most exposed after that, as it is slightly overvalued on present year estimates. Liberty Media is likely the most risky because of its comparative lack of diversification.
That being said, I would never bet against John Malone.
As of this writing, Lawrence Meyers was long BRK.B. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.