Forever is a long time, particularly in the stock market. The Wall Street Journal archives are full of stories of companies that were once the toast of the town, only to fall into irrelevance or bankruptcy.
Enron, Lehman Bros., BlackBerry (BBRY) and JCPenney (JCP) are all fine examples of companies that were once leaders in their respective industries but fell into peril. The first two are long dead, and JCPenney and BlackBerry are fighting for their lives.
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So how do you know which stocks are “buy and hold forever” stocks? Well, no rule will work 100% of the time, but these guidelines will get you close:
- The company is a leader in its respective industry.
- The industry is not particularly susceptible to technological disruption.
- Demand for the company’s products is relatively immune from fickle consumer tastes.
- The company has a “black swan-proof” balance sheet with modest amounts of debt.
- The company has a long history of prudent shareholder-friendly actions, such as paying and raising the dividend.
The first bullet is actually the least important, as all of the spectacular blowups I mention above were once industry leaders. But I include it because, when combined with the other four points, we get the makings of a quality “buy and hold forever” list.
So, with no further adieu, let’s jump into the list of stocks to buy and hold forever:
I’ll start with global drinks giant Diageo (DEO), one of my very favorite long-term holdings.
Diageo meets all of our criteria. DEO is the leading premium spirits company in the world, its products are as close to technology proof as you’re going to get, its liquor brands span across all tastes and preferences, its business is robust enough to survive economic shocks, and Diageo is a Dividend Achiever par excellence.
I once, tongue in cheek, argued that Diageo was the ultimate 12- to 18-year play in reference to its premium scotch brands.
You see, anyone can start an exclusive new vodka brand given a sufficient pool of capital. Consider the example of Grey Goose. American billionaire Sidney Frank created the brand in 1997 and sold it to Bacardi just seven years later for a quick $2 billion.
However, had he opted instead to create a new scotch brand, he would not have lived long enough to enjoy its success. When the late Mr. Frank passed away in 2006, his first batch of scotch still would have needed another five years or more of aging to be taken seriously.
Diageo’s dominance of scotch via Johnnie Walker and its other brands is a competitive advantage that won’t be disappearing any time soon. DEO also gives you access to the consumers of tomorrow; the company currently gets 42% of its sales from emerging markets, and it will soon get more than half.
Diageo stock currently pays a dividend of 2.7%. I recommend you buy Diageo, instruct your broker to reinvest the dividends, and hold on to it — forever.
Next on the list is Anglo-Dutch consumer goods and packaged foods company Unilever PLC (UL).
If you’ve ever set foot in a supermarket anywhere in the world, then you are familiar with Unilever’s brands. Among many others, they include Axe, Ben & Jerry’s, Bertolli, Dove, Lipton, St Ives, VO5 and Vaseline.
If there was ever a set of products that was unlikely to fall to technological obsolescence or a black swan event, it would be Unilever’s.
But while its products might be mundane consumer staples in the West, UL has excellent growth prospects abroad. Unilever gets nearly 60% of its revenues from emerging markets, and while that hurt the company this past quarter, it ensures that UL has a bright future as living standards continue to rise.
Unilever also has one of the strangest share structures of any company on the planet. It’s listed in both London and Amsterdam as two separate companies, Unilever PLC and Unilever NV (UN), respectively, and both trade in the U.S. as ADRs. Back in the 1930s, management found it easier and cheaper to do a “business merger” rather than a “legal merger” between the British and Dutch companies that today make up the Unilever Group.
Don’t be distracted by any of this. For most intents and purposes, UL and UN are the same. The only effective difference is that UN is subject to 15% withholding taxes on dividends in the Netherlands, whereas UL is not. This does matter somewhat, as the dividend is an important part of Unilever’s returns. The company has raised its dividend every year for over 25 years and currently yields 4%.
For this reason, I recommend UL over UN.
Next on the list is global megabrewer Heineken (HEINY). Beer is no longer much of a growth industry in the West, but demand is stable. And in many emerging markets, beer still is a phenomenal growth opportunity and an excellent way to invest in rising incomes among the new global middle class.
Heineken gets about half of its revenues and 64% of its sales by volume from emerging-market countries, and it has excellent positioning in Africa — the last real investing frontier of any size. Africa already accounts for 22% of Heineken’s sales by volume and 14% of revenues, and this percentage will only increase with time as African consumers trade up from homebrews to branded beer.
Prices are considerably higher in developed countries, which explains the gap between revenues and sales by volume. Heineken sells less beer in the West, but it charges more for the beer it sells. As incomes rise in emerging markets, expect this gap to close.
Thirty years from now, Microsoft (MSFT) and Apple (AAPL) might no longer exist, or if they do, you can bet that they will look vastly different than they do today. But 30 years from now, beer drinkers the world over will still be cracking open bottles of their favorite brews.
Heineken trades for a reasonable 17 times earnings and pays a modest 1.8% dividend. Buy it and don’t let go.
Moving away from consumer brands, I want to highlight my favorite long-term REIT holding, Realty Income (O), a conservative triple-net REIT that owns things like pharmacies, gyms and distribution centers. Realty Income is very selective in both the properties it chooses and the tenants responsible for paying the rent.
Realty income has a 44-year track record as a landlord. It owns 3,800 commercial properties in 49 states and Puerto Rico, all of which are leased under long-term leases typically of 10 to 20 years. To spread the risk, Realty Income’s tenants are spread across 200 companies and 47 industries.
Realty Income has been a dividend-paying and dividend-raising monster since going public in 1994. In 19 years, it’s made 519 dividend payments and hiked the dividend 73 times. Importantly, unlike many of its brethren in the REIT space, Realty Income sailed through the 2008-09 meltdown without a scratch. Not only did it maintain its dividend throughout, Realty Income actually raised it.
I have no idea what the world will look like 30 years from now. But I have no doubt in my mind that the three rules of real estate will be the same then as today: location, location, location.
Realty Income has taken a beating of late, as have most income-oriented investments. Fears of rising bond yields and Fed tapering have scared away would-be investors.
Use this as an opportunity. Buy Realty Income, enjoy its 5.6% dividend, and … well, keep on enjoying.
Last on the list is the Swiss confectionery giant Nestlé (NSRGY).
Nestlé sells food and nutrition products; everything from baby formula and chocolate milk to instant coffee and packaged food. These are the kinds of products that tend to have stable demand, even in a recession. Times would really have to be hard for a person to forgo ice cream or chocolate candy.
Nestlé currently yields 3.1%, and as you have come to expect, that dividend is growing. Nestlé has grown its dividend every year since 1996, and its dividend has grown at a 12.5% annual clip since 2001. (Note: These rates are in the company’s reporting currency, the Swiss franc.)
Few companies in the world have as global a footprint as Nestlé. The company is active on every inhabited continent, and it gets 30% of its sales from fast-growing emerging markets. This is expected to be as high as 45% by the end of this decade, meaning that Nestlé has ample room for continued growth.
I cannot be certain of much in this world, but of this I have no doubt: 30 years from now, Nestlé still will be in business, and the company will be selling a lot more food and drink products than it is today.
Its dividend will be a lot higher, too.
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Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long DEO, HEINY, NSRGY, O and UL. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.