Whenever big Wall Street players speak on their market views, retail investors can revere engineer what these views and opinions actually mean. Today, a view (or rather, a warning) comes from Warren Buffett himself, though it was not issued recently. From the Berkshire Hathaway Inc. (NYSE: BRK.B) 1999 shareholder letter, a 2001 interview with CNN Money gave the rest of the market a glimpse of the future.

Turns out, he was right. Buffett called for what some may call a “Lost Decade” in the S&P 500, and from 2000 to 2012, the stock market returned roughly 3-4% on an annualized basis. At the same time, bonds and other income-focused investments like dividend stocks would have outperformed the market’s flattish path.

Before investors go through the factors making this warning as relevant today as it was back then, they should understand that it is income-focused assets like bonds through the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) or dividend stocks like Altria Group Inc (NYSE: MO) and Prudential Financial Inc. (NYSE: PRU) will be the best place to be during the next decade; along with a bonus sector to keep in mind.

Altria Group and Prudential Financial Stocks Could See Strong Buying Pressure Soon

Not all dividends are the same. Those paid by companies thought to be safe and projected to remain stable and sound into the future will have certain preferences from investors. This is why considering Altria Group and Prudential Financial is key for the coming years.

With inflation threatening to come back into the U.S. economy, companies that can pass down their costs to consumers the easiest, keeping their cash flows big enough to afford ongoing high dividends, will be the ones that outperform most others not able to keep up with inflation.

Altria Group stock’s payout of $4.08 a share, which translates into a 7.6% annualized dividend yield, is a great place to start diversifying away from inflation. This high payout and business stability have recently boosted some analysts' valuations for the stock.

Deutsche Bank and Stifel Nicolaus boosted their valuations on Altria Group stock as high as $60 as of November 2024. To prove these new targets right, investors would have to ride the stock higher by 11.4% from its current price.

Then there’s the inflation protection from insurance businesses and their ability to raise premiums above inflation rates. This is where Prudential Financial stock comes into play, paying a dividend yield of up to 4.3% to keep up with potential inflation.

Knowing that financial and valuation growth could be the norm for Prudential Financial stock, Abrdn decided to boost its holdings in the stock by 4% recently, bringing its holdings up to $158.1 million today.

Why Buffett’s Current Market Concerns Have Driven Him to Cash

In 1999, Buffett was concerned about the share of corporate earnings as a percentage of GDP, which as only 6.3%. Today, that figure looks more like 11.5% compared to the 4% historical level Buffett quotes in the interview.

What this means is that corporate earnings (or earnings per share) need to grow at high double-digit rates only to keep up with inflation and the near 5% being priced into the bond ETF already mentioned. This probably won’t be the case, and even if it is, high inflation and high bond yields will eat away most of the growth the S&P 500 can manage to deliver.

This is also why Goldman Sachs analysts have called for a lost decade scenario this time around, seeing only 3% annualized returns in the S&P 500, just like when Buffett said so in 2000. However, this doesn’t have to mean all stocks will underperform, as Buffett is still buying a select sector.

Energy stocks will likely do well during this period, as inflation and high bond yields help commodities like oil see higher prices. After buying up to 29% of Occidental Petroleum Co. (NYSE: OXY) and selling out of stocks like Apple Inc. (NASDAQ: AAPL) and Capital One Financial Co. (NYSE: COF) to go into his biggest cash holding in history, Buffett’s view is clear as day.

Now investors know that income-focused stocks like the ones on today’s list, as well as some of the best energy names, will help their capital survive this potentially lost decade scenario that both Warren Buffett and Goldman Sachs are calling for.