Buy stocks now that will stand the test of time and pay you to invest.
We love talking about the hot stocks here on the blog but what about the stocks you can buy and know they’ll produce solid returns for decades?
How do you find those forever stocks you can buy and just sit back and collect the checks?
It’s something every investor needs to know. Gone are the days you could just park your money in huge companies like GE and feel confident that your money will be there when you retire.
In this video, I’ll reveal the three factors I look for when buying stocks for the long-term and five stocks to buy right now.
Now I love to buy deep-value stocks and benefit from that near-term rebound. Perfect example is the Hanesbrands position in our 2019 Stock Market Challenge. I saw rising online sales and strength in the activewear segment ahead of a 52% surge in the shares.
But you also need to be investing for the long-term, right? We want to be building a portfolio that benefits from quick wins but one where our stocks are going to withstand the test of time.
Fortunately, there is a way to get both. Get that short-term pop plus the long-term returns that will beat your investing goals, or as I call them, forever stocks.
That’s exactly what we’re going to be doing today. In this video, I’ll show you the three factors I look for when picking stocks to buy for the long-term. I’ll cover each factor then I’m going to be revealing five stocks to buy right now that I think will produce those double-digit returns over the next 30 years.
The first factor I’m looking for in forever stocks is a dividend yield and there are a few reasons for that.
First is that, stocks that pay dividends just tend to do better. Now this graphic is a little jumbled but groups of stocks paying dividends and those with a history of growing their dividends are the blue lines at the top while no-dividend stocks and those cutting their cash payouts are the two bottom lines. The research this was based on has been sliced and diced every way but the simple truth is that dividend-paying companies beat the market.
One of the reasons for this is because that dividend payout acts as cash discipline on management. It’s harder to spend on those questionable projects if you know you’ve got to meet that $400 million dividend payment at the end of the quarter.
That dividend payment is like having some of your paycheck automatically invested instead of it sitting in your checking account tempting you to spend it on whatever commercial you see next. If you just don’t have the money sitting around, you’re less likely to spend it on stupid crap you don’t need.
Another reason I want to be investing in dividend stocks is because it’s always a positive return. This chart shows the percentage of return from dividends and price in each decade. Dividends might be a small part of your return when the market is booming like in the 90s but when the stock market crashes, that dividend return may be all you collect. Thirty years is a lot of bear markets so having those dividend stocks is going to be a lot of protection.
Now when I’m looking for dividend stocks, I want a company paying a yield of at least 2%. That’s the average dividend yield on the S&P 500 so I like to look for stocks paying maybe a little above average.
I also want to look at the payout ratio though and this is something we’ve talked about before. The payout ratio is the percentage of profits paid out to cover the dividend. I like to see a payout ratio of 60% or less so I know the company is keeping enough money back for growth as well as making those cash payments.
So obviously you know I’m all about dividend stocks but there’s another side of investing, looking at companies with the fastest growth. Think names like Tesla, Netflix and Amazon. This growth investing can be just as profitable or more than dividend investing so I need your opinion. Which do you want to see more videos about, dividend or growth investing. Just scroll down below the video and let me know in the comments.
An important note here, any type of investing can get really expensive if you’re buying and selling a lot. That’s why I’m using M1 Finance for our 2019 stock market challenge for a no-fee investing option that saves thousands.
The second factor I’m looking for in these long-term stocks to buy is going to take advantage of big macro trends. This means finding companies that will benefit from those large, universal trends like aging populations, food demand, automation.
We’re talking the massive, unstoppable forces that will unfold over decades. This kind of long-term investing is the best thing you can do for your portfolio and it’s really how some of these hedge funds managers like Seth Klarman make their billions.
This is one of my favorite ways to invest because it makes it so easy. You’re looking at these big trends and thinking, OK which sectors or industries of the economy will benefit? Those forces are going to drive demand for every company in that sector and industries so once you answer that question, you just look for the leaders in the group.
The best part is, you don’t have to pick that one best company because all the players in the group will benefit from these massive shifts.
Some of the biggest macro trends I’m watching include aging populations, so the fact that 10,000 Americans are reaching retirement age everyday and that’s going to affect everything from government services to consumer spending.
Food demand, global agricultural production just isn’t keeping up with demand, obviously automation and artificial intelligence will bring huge shifts in work and other areas.
Big data, and especially with the coming 5G networks I think will bring a wave of changes. Finally the shift in economic and political strength to Asia and here we’re not only talking about China which is the big one but also India and other parts of the region.
The third factor I’m looking for in long-term stocks is going to be just as important and that’s companies safe from the destruction in those macro trends. Just as a lot of opportunities are created from those massive trends, there’s also going to be that creative destruction that is the hallmark of capitalism.
With this one, think of entire industries like newspapers and magazines. Think of once hugely successful companies like Kodak that, while it’s survived, it’s hard to argue that the company is the giant it used to be.
Here I’m thinking about industries at risk from automation and AI and we’re not just talking about making the industry obsolete but the kind of change that will be hard for companies to keep up with.
There will always be a need for banking but the evolution to online banking, peer-to-peer lending and even digital currencies is making it very difficult for banks to keep up. You could have a best-of-breed bank stock but if they aren’t constantly adapting to these changes, it’s not going to last the thirty years.
I’m also looking at companies at risk to big regulatory concerns and what we’ll just call Death-by-Amazon. So here I want to stay away from pharmacy retail and drug makers, not because I think those industries won’t be around but because these big risks are evolving so quickly that a lot of companies won’t be able to keep up.
So those three factors are guiding my long-term investments but of course, I’m still doing that deep fundamental analysis when I pick stocks. I’m looking at cash flows and profitability like we’ve talked about in other videos and finding companies with a distinct advantage over competitors.
I know it’s a lot but nobody said finding the best stocks for the next 30 years would be easy. Now I’m going to reveal five names that I think could make the cut. Some of these are going to be pretty safe bets while others could be a little more risky.
Our first stock is an anchor for a lot of portfolios, Campbells Soup, ticker CPB. The $10 billion leader in packaged foods controls 60% of the canned soup market and a strong position in snacks and beverages. That kind of market share and size gives it negotiating power against retailers in shelf-space and pricing.
Management has made some missteps over the last couple of years but has also been the victim of some bad economics in food packaging. Food costs have been rising at around 3% annually but companies haven’t been able to pass these increases on to customers so profitability has suffered. Shares have fallen about 45% since mid-2016 but represent some great value right now.
Management has already driven $550 million in cost savings and expects another $400 million through 2022 which should rekindle some profitability. They’re also expecting to announce buyers for the international business and Bolthouse Farms Fresh segment by the end of the year. The two segments represent about $2.1 billion in revenue so I’m modeling around $4 billion from buyers that will significantly help to pay down some of that debt that’s acting as an overhang on the shares.
Earnings are expected 0.8% lower over the next four quarters but the company has a strong history of beating expectations. I’m forecasting $2.55 in earnings per share on stronger profitability which would put the shares around 14-times on a price-to-earnings basis.
The shares trade at a price of just 1.1-times sales which is a 40% discount to the five-year average and almost half the two-times average price-to-sales multiple in the industry so some good value here.
Besides a great valuation, solid dividend and just the strength of the company’s business, I love Campbells here for a potential catalyst. Activist hedge fund Third Point has been battling the company for years to unlock shareholder value and take control from the Dorrance family. The hedge fund owns about 7% of the shares and finally won an agreement last November to add two of its nominees to the board of directors.
That means shareholders have a strong voice on the board that is expert in increasing value. The hedge fund has said everything is on the table including a breakup of the company or asset sales to unlock value and investors get paid a 3.9% dividend while they wait.
So I like Campbells but you’re thinking, mmmm I just don’t see soup as a growth market that’s going to jump over the next 30 years. What else ya got for me?
China Mobile, ticker CHL, hits our list of stocks to buy for the long-term next. Just about every U.S. company has a ‘china’ plan to break into some part of the world’s second largest economy. Even though the U.S. economy is still about twice as big, China’s economy is adding almost twice the value to its economy every year because it’s growing so fast.
Getting exposure to that growth through U.S. companies with sales in China just isn’t enough. EVERY SINGLE INVESTOR needs to own some Chinese domestic stocks and China Mobile is one of my top picks.
The telecom company controls 61% of the 4G market and 60% of the total wireless market. With 916 million subscribers, it’s the largest telecom in the world and despite this ginormous size already, it’s still posting some astonishing growth. China Mobile also became the country’s largest fixed broadband provider last year, controlling 42% of the market and accounting for 73% of all new broadband customers versus the other two telecoms China Unicom and China Telecom.
China is determined to be the leader in 5G, it’s said so publicly and this is one of the first tech evolutions where it really has a chance to set the pace and it’s going to do it. That’s going to open up a lot of opportunity for telecoms and the broader economy. IoT smart connections among corporate clients increased 154% in the first half of last year to 384 million, that’s already more than the entire population of the United States.
Behind all this growth is also one of the strongest balance sheets I’ve seen with $70 billion in cash, that’s more than 30% of the company’s stock market value. For comparison, Apple’s cash stock pile is less than 10% of its market value and China Mobile is generating over $7.6 billion in free cash flow every year.
Shares pay a 3.9% dividend yield and the company pays out 48% of profits to the dividend which is solid but still obviously leaves lots of money for growth. At a price-to-sales ratio of two-times which is just under the 2.15-times average over the last five years, the shares aren’t a bargain here but the long-term potential is undisputed.
There is one major drawback to China Mobile, the controlling ownership by the Chinese government. As the controlling shareholder and regulator of all three domestic telecom operators, the government is a limiting force on how powerful any one company can become. In fact, over the last decade, it’s swapped out the CEOs of the companies twice to try distributing management experience and knowledge. The upside to all of this is that the Chinese market will continue to grow and the government wouldn’t consider letting anyone else play beyond the three established companies so you basically have an implicit guarantee for China Mobile.
ConAgra Foods, ticker CAG, is one I added to our 2019 Dividend Portfolio in February. The company is a U.S. powerhouse in prepared meals where it’s the second-largest in the industry. It has a 40% market share in canned tomatoes and more than a fifth of the meat snacks market with Slim Jim. The company has some solid brands in that relatively safer consumer staples sector so we’re talking dividends as well as a recession-proof industry.
Management fumbled big time with last year’s Pinnacle acquisition and had to lower the profit outlook by 20% late last year. The problems were centered around Pinnacle’s distribution business so a little harder to read but management has been very transparent since December about its plans going forward. I think they’re being overly conservative on estimates for a 5% sales decline and margin loss on the Pinnacle assets so the next surprise could be on the upside when things come out better than expected.
Despite the missteps, the Pinnacle deal still brought a lot of opportunity to the company with a position in the faster-growing frozen foods space. Consumer data is showing millennials are adopting frozen meals at a higher rate than previous generations and it’s hard to imagine a tech shift that could put this industry in jeopardy.
Shares of ConAgra pay a 3.9% dividend which management has affirmed with its new 2019 outlook and trade for just 9.9-times trailing earnings, that’s a 41% discount to the price multiple where it was trading in November. Cash flow is still solid and management is expecting $215 million in cost savings through 2022 on the acquisition. The average analyst price target is 50% higher than the current price and even the lowest price target is 8% higher.
Next we have the Vanguard Real Estate ETF, ticker VNQ, which is probably my favorite exchange traded fund and another in our 2019 challenge portfolio. It holds shares of 187 real estate companies spread across all the property types and across the United States.
Everyone in the community knows I’m a huge believer in real estate. I got my first professional job as a commercial property analyst while in college, I’ve managed my own rental properties and have seen real estate create more fortunes than any other asset. Real estate is truly a generational wealth-builder and will always be in demand.
The fund pays a 4.2% dividend yield and has returned 14.7% annually over the last decade. Beyond the solid cash yield and return, this is a great opportunity to take a little risk out of the stock market and have it in a real physical asset like property.
The fund has been under pressure over the last couple of years because of those rising interest rates. Obviously with the leverage used in real estate, any time you have rising rates, that’s going to weigh on returns but the Fed has signaled no more rate hikes this year and that could unleash a lot of value in real estate.
We saw the real estate fund in blue here outperforming stocks through 2017 when rates started heading higher. Looking more recently with that market crash last year and we’re seeing real estate outperform again.
Now I know I said I wanted to stay away from pharmaceutical stocks because of that potential for regulatory problems over drug prices but I think Cardinal Health, ticker CAH, deserves a spot on the list. The $15 billion leader in medical supplies and pharmaceutical distribution to hospitals and pharmacies is diversified enough that I think it can withstand some of that regulatory risk.
The biggest reason I’d overlook that risk of problems with drug pricing is the company’s position in one of the biggest and surest demographic trends, the aging population. The very middle of the Baby Boomer generation, those born in 1955, turn 64 years old this year. That still puts a tidal wave of people over the next two decades that will be increasing the demand for healthcare.
Between AmerisourceBergen, Cardinal Health and McKesson, these three companies control 90% of the pharmaceutical wholesale market in the country. Even if we do see true enthusiasm for drug price controls from the government, which is a long-shot to start, then I think it’s likely the industry can negotiate a compromise that still maintains solid profits while moderating price increases.
Management has identified over $300 million in cost savings it can drive this year and next which could rocket free cash flow. Shares pay a 3.8% dividend yield and the payout has grown at an 8% annualized clip over the last five years.
Analysts are only expecting 2.4% earnings growth to $5.10 per share over the next year but the company has a history of thrashing expectations. Over the last two years, management has surprised on the upside by 14% over expectations with even stronger results lately. Even the estimate though puts the shares at 10-times earnings so definitely some value in this one.
Finding stocks to buy now isn’t the only question you need to ask as investor. It’s just as important to find the investments that will not only grow your money but the companies that will be around when you retire. Use a few basic screens and analysis to find these forever stocks to invest your money and have the confidence that it will be there when you need it.