If I Had To Retire With Only 5 Stocks, It Would Be These

Summary

• Warren Buffett once encouraged investors to only make a few high-quality investment decisions and then let time and compounding do their work.
• I apply that approach to high-yield investing by selecting the stocks I would pick to retire on if I could only choose five.
• I also list several other honorable mentions.
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In my recent article, Why I Do Not Buy and Hold High Yield Stocks, I discussed my investment strategy and why I believe that taking an active approach to managing a portfolio of high-yield dividend stocks that involves opportunistic capital recycling is a great path to achieving outsized long-term total returns.

However, some investors, such as Warren Buffett, advocate for a more passive investing approach, where investors make only a few really high-quality decisions about where to allocate capital and then let time and the power of compounding do their work. For example, he once spoke about the virtues of his approach during a lecture at a business school. He said:

I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.

With that approach of just buying a few high-quality stocks in mind, this article will discuss which stocks I would choose if I could just pick five that I had to hold for the rest of my life and retire on.

#1. Enterprise Products Partners Stock (EPD)

I chose EPD because it has a very defensive and durable business model, thanks to its well-diversified portfolio of high-quality and strategically located midstream assets. It also has the midstream sector's best credit rating of A- from S&P, which is backed by low leverage, significant liquidity, and a very well-laddered debt maturity calendar.

Moreover, its distribution yield is very attractive, sitting at 7.1% at the moment, and has been growing at a 5% CAGR in recent years. Given its 25-year distribution growth streak and a 1.7 times distributed cash flow coverage ratio expected in 2024, along with its substantial growth backlog and significant insider alignment (insiders own nearly a third of the company's equity), I have a great deal of confidence that it will continue to grow its distribution at inflation-beating rates while management runs the partnership for the long term through prudent and conservative capital allocation decisions. Most importantly, thanks to its hefty current distribution yield, EPD will be providing me with lucrative passive income to help me meet my living expenses so that I never have to sell any stock during market downturns.

While I would have liked to potentially also invest in Enbridge (ENB), Energy Transfer (ET), or MPLX (MPLX) for my midstream pick, I ultimately chose EPD over these because of its stronger balance sheet and management track record that is arguably as good, if not better than its competitors. Management quality and balance sheet strength are extremely important factors when deciding where to allocate capital for lengthy periods of time.

#2. Brookfield Renewable Partners Stock (BEP)(BEPC)

I chose BEP because it also has a very strong balance sheet with a BBB+ credit rating and a 12-year weighted average term to maturity on its debt, the vast majority of which is non-recourse and at fixed interest rates. Moreover, the vast majority of its cash flows are contracted to investment-grade counterparties and are indexed to inflation, making it a great all-weather stock that can generate stable cash flows during economic booms and busts while also remaining relatively immune to a higher inflation and interest rate environment.

Its nearly 7% distribution yield and lengthy track record of growing it every year at a mid-single-digit rate give me confidence that I'll be able to enjoy lucrative current passive income, as well as see that passive income stream grow at a rate that beats inflation for years to come. With management guiding for an FFO per unit CAGR of over 10% for the next five years at least, Brookfield Renewable Partners appears poised to not only deliver stable and growing passive income but also very attractive total returns over the long term without assigning investors too much risk.

I also considered picking Brookfield Infrastructure Partners (BIP)(BIPC) instead of BEP but ultimately decided on BEP because BIP already has significant exposure to midstream, which I already have with EPD and I also think that BEP offers a more attractive overall risk-reward profile than BIP at the current moment.

#3. Brookfield Asset Management Stock (BAM)

I chose BAM because it has no debt, has a very attractive long-term growth outlook, offers a reasonably attractive current dividend yield of 3.5%, and has a very strong moat, thanks to being the second-largest alternative asset manager in the world. It also has excellent management with the likes of Bruce Flatt at the helm as CEO and prestigious investors like Howard Marks on the board as well.

While Blackstone (BX) would also make for a solid pick, due to its relatively attractive yield and exceptional track record, as well as its powerful position as the world's largest alternative asset manager, I ultimately sided with BAM over BX because:

1. BAM is a little bit cheaper at the moment than BX
2. BAM's dividend is fixed, therefore generating more dependable passive income, whereas BX's dividend is variable from quarter to quarter, thereby making it less dependable.
3. BX has significant exposure to China and seems bent on continuing to invest aggressively in the country. Given the geopolitical uncertainty surrounding China, as well as storm clouds gathering over its economy, I would rather steer clear of major exposure to the country in favor of BAM's greater focus on other regions.

#4. W. P. Carey Stock (WPC)

I decided to invest in WPC because it has a strong BBB+ credit rating from S&P, has good asset diversification between industrial, warehouse, and retail, along with a small allocation to storage real estate. It also offers a very attractive and well-covered current dividend yield of 6.8%, has a solid growth runway due to its aggressive investments in industrial warehouse real estate, and also has the best inflation protection of any major blue chip triple-net lease REITs thanks to its significant indexation to CPI in its leases.

While I thought about investing in other blue chips such as Realty Income (O), Agree Realty (ADC), Mid-America Apartments, or Camden Property Trust (CPT) - as I believe both the triple-net lease and multifamily REIT sectors make for attractive long-term compounders and are currently attractive to buy - I ultimately settled on WPC because it offers a much higher current dividend yield while still having sufficient inflation protection to make multifamily's greater inflation protections not enough to compel me to invest there instead.

#5. Blackstone Secured Lending Stock (BXSL)

I chose BXSL because virtually its entire portfolio is invested in first-lien debt. I like this because it gives it a greater degree of defensiveness, making it an investment that is more likely to sustain its value and dividend for the long haul. Moreover, it has an investment-grade balance sheet, is managed by the world's largest alternative asset manager, and invests almost entirely in floating-rate loans, which makes it a nice hedge against some of my other holdings, which tend to struggle when interest rates rise.

Additionally, its dividend is very well covered by its net investment income, and it does not trade at nearly the premium that some of its blue-chip peers like Main Street (MAIN) trade at. While I like Ares Capital (ARCC) due to its impressive track record and external management by Ares Management (ARES), which brings a lot to the table from an underwriting perspective, Blackstone's team is arguably just as good, and BXSL's dividend yield is still very attractive, and its management fee is much lower than ARCC's is.

Investor Takeaway

While I would generally recommend having much more diversification than just five stocks in a retirement portfolio, in the spirit of listening to Warren Buffett's advice to only make a few long-term oriented investment decisions and then letting time and compounding do its work, rather than getting so hands-on with your portfolio that you risk letting your emotions get the best of you and making mistakes, these are five high-quality dividend stocks that I think are worthy of a buy-and-hold-forever approach while also offering high enough dividend yields to be able to fund our retirement.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WPC, EPD, BEP, BIP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.