[Editor’s note: “The 8 Best Cash Cow Stocks to Buy for Stable Returns” was previously published in November 2019. It has since been updated to include the most relevant information available.]
Thanks to positive data from the May jobs report and U.S. retail sales, along with rumors about a second round of stimulus checks, investors may be tempted to adopt a risk-on mindset. However, many in Washington are worried about mass-scale costs. As well, not everything about the economy is encouraging, as Wall Street’s latest selloff demonstrated. Therefore, you shouldn’t give up on cash-rich stocks just yet.
While no one will criticize sharply rising growth metrics, cash flow represents a business’ lifeblood. A weakened cash position can lead to severe problems further down the road, even with strong growth. No matter how viable an organization, it must find a way to keep the lights on. That’s why some of the best investments also feature consistent free cash flow.
Another reason to look at a company’s money outflows as opposed to strictly its income statement is flexibility. Simply put, well-financed operations have more options. They can choose to put money to work through key investments, or to expand operations.
As I alluded to above, these attributes have never been more important. With the novel coronavirus impacting every corner of the global markets and now social unrest clouding the domestic picture, stability should command a premium. In this environment, cash cows offer a measure of confidence, especially if we suffer a prolonged recession. Unfortunately, this is still in the cards.
Below are the eight best cash cow stocks to buy now:
- McDonald’s (NYSE:MCD)
- Coca-Cola (NYSE:KO)
- Berkshire Hathaway (NYSE:BRK.B)
- Facebook (NASDAQ:FB)
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
- Philip Morris International (NYSE:PM)
- Lockheed Martin (NYSE:LMT)
- Microsoft (NASDAQ:MSFT)
Cash Stocks: McDonald’s (MCD)
I’m going to make a confession straight off the bat. I don’t understand why people eat at McDonald’s, particularly those who do so regularly. Admittedly, they make great coffee and their French fries are to die for, but the rest of it? Not quite so appetizing.
Nevertheless, I don’t need to understand a phenomenon to recognize its incredible popularity. Moreover, those who are looking primarily for reliable stocks to invest in should consider MCD stock.
Now, I’m not under any illusions about the tough circumstances surrounding McDonald’s and fast-food restaurants in general. However, I think it’s fair to point out that the company has worked hard to support its franchisees, though it’s clear that many need more assistance.
That assistance may soon come more naturally. All states have now initiated reopening measures. Even liberal California is going back to business despite coronavirus cases rising. Thus, as more people gradually get back to their daily routines, MCD stock could rise on the increased traffic conversion potential.
Additionally, McDonald’s enjoys consistent FCF every year, offering invaluable confidence in an unpredictable market environment. Plus, MCD pays out a 2.68% dividend yield, which investors shouldn’t ignore.
Staying on the junk food theme, investors may want to consider soft drink giant Coca-Cola. During bull markets, KO stock provides consistent passive income with generally steady, though uninspiring returns. But in a bear market, these attributes of stability are what makes Coca-Cola one of the best cash cow stocks to buy.
In the last recession, the company fared well because its underlying products represented a cheap pick-me-up during rough times. And with little in the way of traditional entertainment – no sports, no movies, no traveling – consumers are looking to anything for a quick escape. This narrative may travel further this time around because sodas are cheaper and more convenient than buying a $5 latte at a trendy coffeeshop.
Further, KO stock can directly benefit from the coronavirus. As you know, the lockdowns forced a dramatic paradigm shift for all Americans. Many have turned to eating as a coping mechanism, drawing concerns about longer-term health implications.
It’s likely that these coping mechanisms also involved drinking sugary (read addictive) beverages, which makes Coca-Cola one of the more relevant, though cynical stocks to buy.
Cash Stocks: Berkshire Hathaway (BRK.B)
If you want the stability of the best cash cow stocks to buy while still opening your portfolio toward significant upside opportunities, you may want to check out Berkshire Hathaway. Granted, BRK.B stock has a reputation of being a boring name, especially compared to high-flying growth firms. However, Berkshire’s hodgepodge of multiple industries is now unusually desirable.
Additionally, BRK.B is emblematic of what most people expect from cash cow stocks. For instance, Berkshire ended last year with free cash flow of $22.7 billion. Though it understandably took a dip in the first quarter of 2020, we’re still talking about FCF of slightly over $3.8 billion. Not only is BRK.B stock predictable in this sense, it also gives management an opportunity to pick up companies and sectors on the cheap.
After all, Berkshire is Warren Buffett’s baby, and the Oracle of Omaha is best known for his value investing principle. Therefore, you’ve got to imagine that the coronavirus pandemic has been in some ways a gift. If you don’t have the time to research the multitude of companies that potentially represent great value, buying BRK.B stock is the next best thing.
As a global influencer, Facebook typically represents stability under any circumstance. But this year feels incredibly tense and not just because of the coronavirus. Recently, President Trump issued an executive order specifically challenging how social media companies can police their content. Underlining this contentious issue is the charge that social media firms clamp down far more harshly on conservative voices than liberal ones.
Conspicuously, Facebook essentially decided to play Switzerland on this role, allowing Trump’s controversial and tone-deaf posts to remain on the platform. Cynically, this move may buy FB stock some time and help avoid regulators from clamping down on the digital network. However, this decision also drew much internal strife, with many Facebook employees labeling CEO Mark Zuckerberg as a sellout.
Given the severe controversy, I’m not surprised that FB stock has acted pensively in the markets. Still, the hands-off approach probably makes the most business sense. In addition, social media will likely play a vital role in our new normal, which principally involves contactless or mitigated contact services and communications.
Plus, no other social platform has the reach and utility of Facebook. As we negotiate our way out of this pandemic, this company offers long-lasting pertinence.
Cash Stocks: Alphabet (GOOG, GOOGL)
Out of all the cash cow stocks to buy, Google’s parent Alphabet stands alone. One of the chief reasons why is due to the company’s prevalence across multiple lucrative markets. From laptops to cloud computing to driverless-vehicle technology, GOOG disrupts any sector it wishes.
But the biggest reason I like Alphabet is that it dominates the internet. I realize that it’s a tired argument because everybody has mentioned it. That doesn’t mean, though, that the argument is any less valid.
For instance, we all know that Google is the most popular search engine, but the gap between first place and second-ranked Bing is a whopping 66%!
Moreover, Google is the unquestioned leader of mobile and tablet search engines with a 93% market share. In order to get anything done online, you essentially must go through Alphabet. And if your company doesn’t rank well on Google, you’re dead in the water.
Also, Alphabet is a disruptive force that has direct implications for the new normal. A good example is Stadia, Alphabet’s cloud-based, multi-platform video game system. Providing cheap, contactless entertainment without the need for a console, Stadia could potentially drum up demand for GOOGL stock.
Philip Morris International (PM)
On the surface, it appears big tobacco firms like Philip Morris face a double-whammy.
First, Americans are smoking cigarettes at a significantly reduced rate. Also, the under-18 crowd isn’t taking up the habit like prior generations had. Second, the vaping market has exploded in popularity thanks to its cleaner platform.
I don’t think it’s over for Philip Morris. For one thing, several markets, including the eastern Mediterranean and Africa, have witnessed a lift in smoking rates. That, of course, suits PM perfectly, which is the international arm of the iconic tobacco firm.
I concede that the coronavirus has put a damper on the technical performance of PM stock. Cynically, though, old vices are difficult to kick, especially in a time of quarantine. But even as millions of Americans are now relishing their time in the sun, the economic stress is not something that will likely go away quickly. Therefore, this vice industry is still relevant.
Best of all, Philip Morris is a cash-rich organization. That provides substantial confidence in the company’s generous 6.68% dividend yield.
Cash Stocks: Lockheed Martin (LMT)
In any circumstance, I believe that defense-related cash cow stocks to buy represent solid investments. Though somewhat controversial depending on your perspective, companies like Lockheed Martin ultimately serve an important purpose: they keep honest (and in some cases dishonest) people honest.
Essentially, LMT stock is a less dire form of mutually assured destruction. Our adversaries are always on the prowl, looking to exploit our weaknesses. Thus, it’s imperative for our country to keep one step ahead. Lockheed Martin is a pivotal component in this perpetual cat-and-mouse game.
Furthermore, defense pays. Lockheed consistently generates strong free cash flow. Additionally, its latest read of return on asset of 14.2% is very favorable considering the circumstances.
Moving into our new normal, I expect LMT stock to trek steadily higher. Unfortunately, the disruption to our global economy will likely invite bad actors to try to advantage the situation. As well, geopolitical flashpoints have been burning hot, from the India-China border skirmish to North Korea blowing up a liaison office which South Korea used to hold negotiations.
Whatever’s causing the craziness, tensions are rising everywhere. Thus, LMT stock is a name to watch closely.
Although a commonly cited name among cash cow stocks to buy, Microsoft continues to justify this title. Indeed, with the shelter-in-place orders that left millions of Americans forcibly quarantined for months, I believe the case for MSFT stock has only gotten stronger.
Obviously, Microsoft has focused heavily on the cloud computing business to much success. With pivotal cloud contract wins, the software giant has given Amazon (NASDAQ:AMZN) a run for its money. Additionally, as companies were suddenly forced into seeking cloud options, many have turned to Microsoft for its brand reputation.
What I especially like about MSFT stock is that the underlying Software as a Service model has also become more relevant. With telecommuting now the norm, there has never been a better time for Microsoft to organically market its suite of business programs.
I expect most of their conversion opportunities to remain with the brand post-coronavirus, making MSFT one of the most reliable stocks to buy.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.