2 Top Dividend Stocks to Buy and Hold Forever

When searching for stocks to buy and hold for the long haul, there are certain things to look for. A strong track record of profitability, manageable debt load, and good history of increasing dividends are just a few characteristics that make a stock a "forever stock." With that in mind, here are two of my favorite forever stocks -- both of which happen to be real estate investment trusts -- and why each could be an excellent addition to your portfolio for decades to come.

A strong business model and excellent risk management
Realty Income Corporation (O 1.94%) is one of my favorite stocks in the market, and for good reason. This REIT focuses on freestanding retail properties, with more than 4,400 properties leased to 235 different tenants.

Source: Flickr user Mike Mozart.

Basically, Realty Income acquires freestanding retail properties and leases them back to high-quality tenants. The company uses long-term "net" leases, which basically means that the tenants are responsible for paying the property's expenses, such as taxes, insurance, and maintenance. And the leases are long term -- up to 20 years -- with annual rent increases built in.

As far as risk is concerned, many investors (understandably) are hesitant to invest in anything having to do with the retail sector. After all, many high-profile retailers have struggled, or even gone bankrupt, in recent years. However, Realty Income forms most of its relationships with retail tenants that fit into one of three specific categories.

• The tenant's business is service based, meaning that it isn't vulnerable to online competition. Businesses like restaurants and health clubs fit into this category.
• The business sells non-discretionary products. Drugstores are a good example of this -- people will always need a convenient place to run out and get medications and other products quickly.
• The tenant sells goods at a low price point, such as dollar stores. These businesses also don't have much to worry about from online competitors, and dollar stores are among the fastest-growing types of retail.

As you can see, all but one of the company's top 10 tenants fit into one of these three categories.

This selectivity creates an incredibly stable base of tenants that are likely to renew their leases over and over. Think about it -- how often does a Walgreens or movie theater just pick up and move its location? Because of this, Realty Income operates at an impressive 98.2% occupancy ratio, which hasn't fallen below 96% no matter what the economy was doing.

Realty Income pays its dividends monthly -- it actually has a trademark on the phrase "the monthly dividend company" -- and has increased its payout 81 times since going public in 1994. Even more impressively, the company has averaged 16.4% annual returns in its public life, and that time period includes the worst real-estate crash in recent history. To put this in perspective, a $10,000 investment in Realty Income at its IPO would be worth more than $240,000 today.

While past performance doesn't guarantee future investment results, there is no reason to believe that this business model that has worked since 1960, when Realty Income was a single Taco Bell, will stop producing market-beating returns anytime soon.

Favorable demographics and a fragmented market should keep this company busy
Health Care Property Investors (PEAK -0.17%), known as HCP, invests in senior housing facilities, post-acute care properties, medical offices, and life-sciences properties.

I have a few reasons for loving HCP as a long-term investment. For starters, the company is one of the largest and most experienced in a highly fragmented industry. According to a recent presentation by HCP, healthcare real estate represents a $1 trillion market in the United States. Only 17% of this is owned by public REITs, and just 3% is owned by HCP -- one of the sector leaders. In other words, there is lots of room for strategic acquisition opportunities in the market right now.

Not only that, but the demographic and economic trends point toward a growing need for the types of properties HCP specializes in. The population is aging rapidly, and the older age groups are expected to grow tremendously in the coming decades, creating more demand for senior housing and other healthcare facilities. In fact, the number of U.S. residents age 85 and older is projected to rise from 40 million in 2010 to 90 million by 2050.

Source: HCP Investor Presentation.

On the economic side of things, U.S. healthcare spending is rising faster than inflation. Just look at the projections for health expenditures as a percentage of GDP.

Source: HCP investor presentation.

Another reason HCP has an advantage is its long-established partnerships with some of the best operators in the business, including Brookdale Senior Living, HCR ManorCare, and Hospital Corporation of America (HCA). HCP leverages these relationships when it expands -- 65% of the company's recent acquisitions or new developments were in cooperation with existing partners.

Finally, it's tough not to like HCP's track record of performance. I mentioned earlier that past performance isn't a guarantee of future results -- but it can be a good predictor. Since going public in 1985, HCP has delivered an average 15.6% total return to its shareholders each year. To put that in perspective, consider that a $10,000 investment at HCP's IPO would be worth about $775,000 today. The company has also increased its dividend every single year in that time period. This level of consistent performance is extremely rare.

Source: HCP investor presentation.

The takeaway
These are just two of many examples of great dividend stocks you can hold for the long haul, and you can take some of the reasoning discussed here and apply it to other companies. Furthermore, you should keep in mind that even though all signs point to a bright future for these three companies, there is no such thing as a risk-free stock. For that reason, it's important to diversify your portfolio, and check up on all of your stocks periodically to make sure your original reasons for buying them still apply.