Share prices have been falling this year, which means that dividend yields have been going up. As a result, I have a number of dividend stocks in my portfolio that are offering yields above 4%.

If I had money to invest right now, I’d be happy buying any of these stocks at today’s prices. I think they represent great value and could provide solid returns over time.

Kraft Heinz

My first stock is Kraft Heinz. It’s one of Warren Buffett’s biggest investments and I think that it’s one of the most misunderstood.

It’s easy to write off this stock. Shares in Kraft Heinz are down more than 50% over the past five years and the company’s revenue growth has been almost non-existent over the past decade.

In my view, the underlying business has been making significant improvements recently. The company’s long-term debt has reduced by 25%.

As I see it, the market hasn’t yet picked up on this one. That’s why I’ve been buying the shares for my portfolio and anticipate continuing to do so.

Citigroup

Another Buffett stock in my portfolio is Citigroup. The stock has fallen by over 27% since the start of the year.

As a result, the shares currently have a 4.5% dividend yield. And the shareholder returns don’t stop there.

Over the last five years, the company has been repurchasing 6% of its shares per year. That’s a welcome boost for me as an investor.

A prolonged economic downturn might prove challenging for Citigroup. But I think it’s priced to reflect this, so I expect to reinvest the dividend that I’ll receive this month.

Aviva 8 ⅜ PF 8 ⅜ CUM IRRD PRF #1

I’m also attracted to Aviva 8 ⅜ PF 8 ⅜ CUM IRRD PRF #1. The complicated-sounding security is preferred stock in Aviva.

It pays a fixed dividend, which makes it a bit more predictable than the common stock. At today’s prices it offers a return of 7.5%. 

The risk with the preferred stock is that it isn’t traded as much as other common shares. If I change my mind about owning it, I might find it difficult to sell.

But I don’t buy shares to sell them again quickly. My plan with Aviva’s this is to just sit back and collect dividends.

Realty Income

Realty Income is a comparatively simple stock to understand. The company owns retail properties and rents them out to tenants.

As a Real Estate Investment Trust (REIT), it distributes 90% of its rental income to its shareholders via dividends. At the moment, it has a yield of 4.78%.

It’s down around 12.5% this year due to rising interest rates. While I don’t think investors are missing anything obvious with this one, I’d buy it at today’s prices.

Rising interest rates are a headwind for Realty Income on two fronts. They make the cost of debt more expensive and drive down the value of property prices.

None of this worries me, though. Realty Income has increased its dividend quarterly for the past 25 years, which tells me the company has seen rising interest rates before and come through ok.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Stephen Wright has positions in AVIVA 8 3/8% PF 8 3/8% CUM IRRD PRF #1, Citigroup, Realty Income, and The Kraft Heinz Company. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Share prices in both the UK and the US are down since the start of the year. But there’s a lot to keep an eye on in the stock market right now.

Three things have been weighing on stocks this year. The first is inflation, the second is rising interest rates and the third is corporate earnings. 

A number of companies provide earnings reports in November. But in my view, the best chance of a stock market recovery this month is from inflation readings and interest rate decisions.

Interest rates

Central banks in both the US and the UK are set to announce interest rate decisions this week. The US Federal Reserve announcement is scheduled for tomorrow and the Bank of England’s news is set for Thursday.

This is the first major opportunity for a stock market recovery in November. Good news about interest rates could cause share prices to pick up.

The announcements themselves are unlikely to cause much surprise. I’m expecting interest rates to rise broadly in line with expectations that US rates will reach 4% and UK rates will reach 3%.

I think that there’s some scope for good news, though. If either central bank indicates that it might be looking to slow the pace of interest rate increases, then share prices might well start to climb.

According to Warren Buffett, interest rates are like gravity for stocks. They keep share prices down and their effect is inescapable.

That’s why I think good news around them might mean the start of a stock market recovery in November. But the biggest chance comes later this month.

Inflation

While interest rates impact the stock market, I think inflation data is much more important right now.

Central banks have been increasing interest rates to try and bring rising prices under control, but with little success yet.

In the UK, the most recent inflation reading was 10.1%. In the US, things aren’t much better, with price increases at 8.2%.

Since June, the inflation rate in the US has come down steadily from 9.1% to the current level. If that positive momentum can continue, then this could be good news for stock prices.

The pattern in the UK has been less encouraging. So far, inflation hasn’t been showing any signs of reverting back to the Bank of England’s target level.

To my mind, that means there’s plenty of scope for encouraging news. Any sign of price rises stalling or reversing could help kick off a stock market recovery.

Should I buy stocks in November?

I don’t anticipate a meaningful stock market recovery any time soon, though I wouldn’t be surprised to see a small move higher in the near future. So should I buy stocks in November?

When I invest, I try to focus on the business I’m buying shares in as well as the price I have to pay. As long as I think I’m getting a good deal, I try not to worry about where the stock market will go next.

Regardless of whether share prices go up or down this month, I think there are some good opportunities for me right now. As a result, I’ll be buying stocks this month.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The annual Stocks and Shares ISA allowance is £20,000. With share prices where they are, I think I could invest this to generate significant monthly passive income.

I think there are some great opportunities in real estate investment trusts (REITs). In my view, these can be great stocks to own for generating passive income.

There are two on my radar at the moment. Each of them pays its dividend monthly and each has a solid record of increasing its payments.

Realty Income

Top of my list of stocks to buy for monthly dividends would be Realty Income (NYSE:O). The company owns and rents out retail properties.

Realty Income focuses on managing its risk. It attempts to concentrate on securing high-quality tenants with strong credit ratings in order to minimise the risk of unpaid rent.

Shares of Realty Income have fallen by around 14% since the start of the year. As a result, the stock now has a dividend yield of 4.87%.

I’d look to invest £10,000 into this stock. In doing so, I’d anticipate generating around £40 in monthly passive income.

STAG Industrial

One of the biggest risks with Realty Income is the rise of e-commerce. I’d look to counter this in my portfolio by using the rest of my ISA allowance to buy shares in STAG Industrial (NYSE:STAG).

STAG is another REIT, but it focuses on industrial properties, such as warehouses. These are important for distribution and stand to do well as e-commerce continues to grow.

I don’t own shares in STAG at the moment, but I’d like to buy it for my portfolio to counter the risks of Realty Income. The risk with STAG is that the growth of e-commerce doesn’t materialise in the way that it might be expected to, but I hope that owning Realty Income in my portfolio offsets this risk for me.

Shares in STAG are also trading lower than they were at the start of the year. The stock is down 35% compared to its price at the beginning of January.

Due to its share price decline, STAG shares have a dividend of 4.9%, which is very similar to Realty Income. As a result, I expect a £10,000 investment to generate around £42 in monthly dividends.

Passive income

That brings me to a total of around £82 per month. In order to bring that to £85, I’d reinvest my dividends and compound my returns. This is what I do with my existing investment in Realty Income.

By reinvesting my dividends in the same stocks, I can increase my passive income. After doing this for a year, I think that I could bring my monthly dividends to over £85.

From there, I think the sky’s the limit. Reinvesting my dividends could bring my monthly income to £90 after a year, £106 after five years, and £133 after a decade.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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Stephen Wright has positions in Realty Income. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Right now, the FTSE 100 is trading at a price-to-earnings (P/E) ratio of around 10. By contrast, the S&P 500 is trading at a 13 P/E multiple.

That makes the UK index look cheap compared to its US counterpart. But could it be a good investment for me?

Historic returns

Over the last half-decade, the FTSE 100 has had some impressive years. The index produced a total return of 17.3% in 2019 and 18.4% in 2021.

Other times, though, the returns have faltered. The index lost 8.7% in 2018 and 11.5% in 2020.

Overall, the average annual return has been just under 6%. That includes both the increase in the level of the index and the dividends paid to investors.

Compounding a £1,000 investment at 6% per year since the start of 2020 would have given me an investment worth £1,191 today. And if I left it for 30 years at that rate, it would be worth £5,743.

Intrinsically, I think that’s a reasonable return. But it’s some way short of the S&P 500, which has averaged around 23% over the same time period.

While the UK index has lagged its US counterpart in terms of total return, I think that there are some really outstanding FTSE 100 stocks. I’m looking to invest in these in my portfolio.

FTSE 100 stocks

Instead of investing in the FTSE 100, I’m looking at some individual stocks that have produced stellar results. In particular, two stocks stand out to me for my portfolio.

The first is Experian. Over the last five years, the share price has increased by an average of 11.46% per year. This means that a £1,000 investment five years ago would be worth £1,720 today even before considering dividends.

Another is Halma. Shares in Halma have gone up by 12.22% annually since 2017. As a result, a £1,000 investment five years ago would be worth over £1,780 today.

In my view, the reason that these stocks have outperformed the FTSE 100 is straightforward. They have increased their earnings per share.

Experian has grown its earnings per share by 11.42% per year on average recently. The stock has gone up by an average of 11.46% each year as a result.

Earnings at Halma have increased by 12.13% annually on average. As a result, the stock has gone up by 12.22% per year.

In other words, shares of both Experian and Halma have increased in line with their earnings growth. If earnings growth slows down, then there’s a risk that either stock might underperform in future.

Both businesses, however, look strong to me. I own both in my portfolio at the moment.

I think that they can continue to grow their earnings faster than the FTSE 100. As a result, I’m looking to add to my investment in both stocks at today’s prices.

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Stephen Wright has positions in Experian and Halma. The Motley Fool UK has recommended Experian and Halma. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The average person in the UK has £6,757 in savings. Rather than keeping all of that in a savings account, I’d look to invest it in UK stocks.

Buying stocks with my money, rather than leaving it in a savings account, allows me to become a business owner. In doing so, I can build my wealth as the businesses I invest in make money.

I wouldn’t invest all of that, to protect myself from any emergencies in the near future. But I’d look to invest some of it, and I’d try to diversify my investments across various different sectors.

Utilities

To start with, I’d look to buy shares in companies that have highly predictable earnings. Utilities stocks are a good example of this.

In general, utilities companies offer good protection against inflation. Their earnings are regulated and this brings risk of unfavourable regulation in the future, but this does mean that they are able to pass on increases in costs to their customers.

The most obvious UK stock to buy from the utilities sector is National Grid. At current prices, the stock has a dividend yield above 5%, meaning that it could start generating cash for me right away.

I’ve been ignoring National Grid shares for some time. But at today’s prices, I think they could be a great addition to my portfolio when I’m in a position with excess cash to invest.

Materials

I’d also look to invest in some companies that are involved in getting basic materials out of the ground. One that stands out to me in this area is Endeavour Mining. 

The company owns and operates gold mines across Africa. This brings risk from political instability, but it also means that Endeavour is able to extract gold at lower prices than its competitors.

In a business where the product is a commodity, the cost of extraction is key. Since there’s no obvious difference between one company’s gold and another’s, the competition comes down to cost.

In my view, Endeavour Mining could be a great addition to my portfolio. I’m looking to buy shares in the near future.

Consumer products

Right now, the UK seems to be heading towards a recession. Combined with inflation, this makes a difficult macroeconomic environment.

There are some companies, though, that I think will do better than many expect. One of these is Howden Joinery Group. 

Higher prices for everyday goods is likely to put pressure on household budgets. As a result, I expect to see fewer people moving house over the next year or so.

Instead, I’m anticipating an increase in the number of people attempting to improve their existing houses. And that’s where Howden’s comes in.

Howden Joinery Group supplies kitchen products, appliances, and materials to trade customers. I’m anticipating an increase in demand over the next couple of years and I think that the company will benefit from this.

In my view, the broader market is missing this point. That’s why I’d buy the stock at today’s prices if I had the cash to invest.

UK stocks

I think that the stocks I’ve identified here could be a great way to protect a portion of my savings from the effects of inflation. A lot of UK stocks in various different sectors look attractive to me at today’s prices. 

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Meta Platforms (NASDAQ:META) reported earnings last night. Meta shares were down 20% in extended trading as a result, putting the stock down a huge 67% since the start of the year.

Revenues came in at $27.71bn, which was 4.5% lower than last year. Earnings per share were 49% lower at $1.64.

So, should I look to add to my investment as the share price goes down? Or should I sell as the underlying business continues to struggle?

Earnings

Meta divides its operations into two segments – the Family of Apps and Reality Labs. The former includes Facebook, Instagram, and WhatsApp and the latter contains the metaverse projects.

Both reported disappointing results. The Family of Apps revenue was down by around 3.6% and profits were 28% lower than a year ago.

Reality Labs reported revenues that were around 49% lower. The segment’s losses also increased.

As a result, the losses at Reality Labs accounted for around 40% of the profit made through the Family of Apps segment. That’s the highest that ratio has ever been. It meant Meta’s overall operating margins went from 36% to 20%.

For the fourth quarter, the company forecast that it would bring in between $30bn and $32.5bn in revenue.

Should I buy Meta shares

Compared to a year ago, revenues at Meta are down a few percent, earnings per share are down 49%, but the stock is down a disproportionately large 66%. So should I buy the shares?

I think so. The results from the Family of Apps segment don’t highlight any significant weakness in the business and it could offset the losses from the metaverse business.

As I see it, the headwinds that the advertising business is facing are the result of the current economic climate, rather than the business itself. Digital advertising results have been weak across the board recently. Alphabet also reported underwhelming earnings this week, indicating that the issue isn’t just with Meta.

And the number of users on Meta’s platforms remains strong. The company reported higher daily and monthly users across all of its platforms, including Facebook.

I therefore think the Family of Apps segment will recover as the economic climate improves. I’d expect weaker earnings in difficult times, so I’m not worried about the latest results.

That leaves the metaverse ops, which I see as a bigger issue. Without a clear path to profitability, this is a significant risk.

Investing in Facebook

Overall, I think advertising profitability should recover to outweigh metaverse losses over time. As a result, I’m looking to buy the stock at these prices.

I started investing in Facebook at the end of last year. Back then, the stock was falling due to declining daily active users, but the company was producing solid financial results.

Today, the reverse is true. The number of users on Meta’s platforms seems stable, but the company is making less money.

I see this as a temporary issue though. As the economy improves, I think that Meta Platforms will prove to be a great buy for me at today’s prices.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Alphabet (C shares). The Motley Fool UK has recommended Alphabet (A shares) and Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Google’s parent company Alphabet (NASDAQ:GOOG) reported its earnings last night. The results were disappointing and Alphabet shares are set to open around 8% lower today as a result.

As I see it, there were two main disappointments. The first is that revenue growth slowed significantly. The second is that increased expenses led to lower earnings.

Neither of these is a good thing, but I don’t think that they justify a 33% decline in the stock since the start of the year. As a result, I’m seeing this as an opportunity to buy Alphabet shares.

Revenue

Over the last decade, Alphabet’s revenue has been growing at an average of 20% per year. Last night, the company reported earnings growth of 6%, with the core advertising business up 3%.

Management put the slow growth down to declining advertising budgets among customers. Most notably, this came from cryptocurrencies and debt-related products.

I think that the slowdown in revenue growth will have surprised a number of investors. I believe that a lot of Google shareholders thought that its customers viewed it as indispensable.

Personally, I didn’t think this. While Google offers a powerful platform for advertisers, I didn’t expect it to prove immune to the effects of lower marketing budgets.

I’m therefore not surprised by the slowing growth. I actually think that a 6% revenue rise in a difficult economic environment is very respectable. 

Income

For me, the decline in earnings is much more significant. Last night’s earnings revealed that Alphabet’s operating margin had decreased from 32% a year ago to 25% last quarter.

This, for me, is more alarming. I didn’t expect Google’s operating costs to increase as significantly as they have done.

In response to this, management said it intends to make the company more efficient. This involves slowing the pace of hiring and scrapping some of its more cash-intensive projects.

The company’s ability to control its costs is something for me to watch closely moving forward. Part of my reason for investing in the stock was because the business could maintain high margins.

As such, I welcome the decision to pause some of its less rewarding projects. Focusing on its core operations right now looks to be the right thing to do.

Should I buy more Alphabet shares?

Over the last 12 months, Alphabet has produced just over $5 in earnings per share. That has been steadily declining through each of the last four quarters, though.

If Google stock falls below $100 per share, then that will put the stock at a price-to-earnings (P/E) ratio of under 20. At that price, I’d look to add to my investment.

I’m expecting the next year or so to be difficult for Google as advertising budgets continue to come under pressure in a difficult macroeconomic environment. But that doesn’t put me off.

Fundamentally, I think Alphabet is an extremely strong company with a terrific product that it’s nearly impossible for competitors to emulate. Over time, I think this will pay off for me.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Alphabet (C shares). The Motley Fool UK has recommended Alphabet (A shares) and Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The full state pension in the UK is currently £185.15 per week. I’m concerned about what it might be when I get to retirement, so I’m looking to build my own passive income streams now.

By building my own asset base, I’m hoping that I won’t have to rely on the state when I reach retirement age. If there’s a state pension for me, great. If not, I’ll manage. 

I’ve got a plan to earn the equivalent of the full state pension in passive income by myself. And it starts with putting money aside right now.

Save

Charlie Munger says that the most important part of building wealth is underspending one’s income. So the first part of my plan involves saving as much as I can.

I think that I’ll need around £240,000 in investments to achieve my passive income goals. That’s a lot, so it’s important that I get started straight away by getting money together to invest.

If I can save £666 per month, that will take me to my target after 20 years. That’s a lot to put aside, but even if I don’t manage that, anything I can save now will help me later on.

Fortunately for me, the next part of my plan involves finding ways to take some of the pressure off my required savings rate. 

Invest

Having put as much as I can aside, the second part of my plan is to invest it. This should set me on the way to reaching my £240,000 target.

The point of doing this is to allow my money to compound without me having to do anything. If I invest £666 today and it compounds at 4% for the next 30 years, it will be worth £2,610.

In other words, investing £666 now and letting it grow at 4%, it can give me three months where I don’t need to save anything.

It’s important that I invest in the right places, though. I’ll need to find companies that can grow their earnings over time while also making sure that I don’t overpay.

Repeat

The third part of my plan is the most straightforward. It involves repeating the first two steps until I get to where I need to be. 

Each month, I’ll need to save what I can and figure out the best places for me to invest the cash I have available. As the stock market shifts around, that might be into new opportunities.

In some cases, the investments I have will pay dividends. I’ll also want to make sure that I’m reinvesting these using the same approach that I use for putting new capital to work.

Fortunately for me, the process should get easier. As my investments develop, the amount that I’ll need to save each month should go down.

Getting started

I’m getting started with this plan straight away. There are two reasons why this is important. 

First of all, according to Munger, the most difficult part of building wealth is the first £100,000. So I’ll get that out of the way as soon as I can.

Second, the money I invest today has the most time to compound. That’s an important part of my plan to make things easier in the future, so I stand to benefit by starting right now.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Inflation is currently at 10% in the UK and 8% in the US. As higher prices lead to lower profit margins, I’m trying to figure out the best stocks to buy for my portfolio.

Costco

Top of my list is Costco. The stock is down around 17% since the start of the year and I think this could be a great time for me to pick up some shares.

Costco sells products that people use each day and it has a reputation for having the lowest prices around. I believe that this will allow it to do well as household budgets come under pressure.

With a price-to-earnings (P/E) ratio of around 35, the stock isn’t cheap and this brings risk. But the prospect of 11% forecasted earnings growth in a stable sector attracts me to Costco shares.

Experian

I also see Experian (LSE:EXPN) as one of the best stocks to buy now for my portfolio with inflation on the rise. The share price has fallen by 26% since the beginning of January.

Experian’s business is built on a database that is nearly impossible for a competitor to replicate. I think that this will help in an inflationary environment for two reasons. 

It means that the FTSE 100 business doesn’t have significant maintenance costs, protecting it from rising prices. It also allows Experian to increase prices, since competition is limited.

The risk with this stock comes with the possibility of rising interest rates reducing demand for loans. But I believe the decline in the company’s share price means that there’s still a return for me. 

Mastercard

I also have Mastercard as one of my best stocks to buy now. The stock is now 20% lower than it was at the beginning of the year.

I think that Mastercard actively stands to benefit from inflation. Higher prices mean bigger payment volumes, which in turn means more revenue for Mastercard.

The biggest risk is that rising interest rates might eventually cause payment volumes to decline as consumers spend less and save more. With inflation still high, though, I think this is some way off.

NextEra

Lastly, I have NextEra Energy (NYSE:NEE) on my list of stocks to buy now. Shares in the company have fallen by 20% this year.

NextEra’s business is protected from competition by regulation. In exchange, the amount that it is allowed to earn in net income is set at a defined level.

This means, however, that the company is allowed to increase its prices in order to offset higher input costs. And its regulatory protection means that there’s no possibility of consumers moving elsewhere.

Once again, the risk is that the stock is expensive. At a forward P/E ratio of around 23, it’s more expensive than other utilities stocks.

As I see it, though, the risk is offset by NextEra’s premium assets. It owns some of the best sites for wind and solar energy generation and I think that these will prove to be worth paying for today.

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Stephen Wright has positions in Experian. The Motley Fool UK has recommended Experian and Mastercard. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Warren Buffett is known for preferring stocks to bonds. But with yields on UK government bonds having increased by over 300% over the last three years, could bonds be worth a look?

Bonds

Buffett’s first reason for staying away from bonds is that the returns aren’t high enough. A 4% yield might seem good, but there’s more to it than meets the eye.

Inflation in the UK is currently running at around 10% per year. Getting 4% more cash when the value of that cash is depreciating at 10% means that bond returns are actually negative in real terms.

Rising interest rates are likely to bring inflation down. But the UK’s central bank is aiming for inflation at around 2%.

With 2% inflation, a bond with a 4% yield will return just 2% in real terms. Even over 30 years, it’s going to be difficult to make significant returns at that rate.

Stocks

Buffett also thinks that, over time, stocks generally outperform bonds. The reason is that bonds have fixed returns, whereas stock returns can grow. 

A £1,000 investment would distribute £45 per year in annual payments. These could be reinvested to eventually distribute a total of £2,281.

I think that there are stock investments that I could make today that have a good chance of generating more than this over the next 30 years. One example is Diploma shares.

At today’s prices, Diploma shares offer a return of 3.58%. The stock has a market cap of £2.77bn and the underlying business has £254.5m in debt, £24.8m in cash, and generates £107.5m in free cash.

That’s lower than the 4% offered by the bond today. But I think that the stock can catch up and outperform the bond over 30 years. 

Diploma has increased its free cash flow by an average of 12.5% each year. If this continues, then the company will provide a greater annual return than the bond within three years.

After that, if it continues to grow, it will leave the returns from the bond in the dust. If Diploma grows its free cash at 5% annually for the remaining 27 years, the total investment return will be £10,147.

That’s over four times the return from owning the 30 year bond for what I think is a realistic scenario for Diploma. As a result, I think Buffett is right that it’s better for me to own stocks than bonds.

Investing risks and rewards

Investing in stocks is riskier than investing in bonds. This is especially true with a stock like Diploma.

In order to outperform the 30-year bond, Diploma has to grow its free cash flow. If the business falters or doesn’t grow fast enough, the stock will underperform as an investment.

But it’s on track to achieve the required growth reasonably comfortably and I think that it will. So with the opportunity to buy shares in companies like Diploma on offer, I’m following Buffett’s advice and staying away from bonds.

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Stephen Wright has positions in Diploma. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.