I like to fill most of my portfolio with "forever stocks" -- that is, stocks that could produce market-beating growth and/or income in my portfolio for decades to come. Three great examples of this, all of which happen to be in the financial sector, are Berkshire Hathaway (NYSE:BRK-B), Bank of America (NYSE:BAC), and Toronto-Dominion Bank (NYSE:TD). Here's why I plan to hold these three stocks for as long as I'm an investor.
A time-tested winning business model
It shouldn't be a surprise that I never plan to sell my shares of Berkshire Hathaway. After all, the company is run by Warren Buffett, the best buy-and-hold investor of all time, and he even advises investors to stay away unless they have a long time horizon to work with.
When you invest in Berkshire, you are really buying over 50 businesses in one stock. Berkshire's portfolio of wholly owned subsidiaries includes such household names as GEICO, BNSF Railroad, Pampered Chef, Fruit of the Loom, and many others.
And, you benefit from Berkshire's closely followed stock portfolio, which includes dozens of excellent companies, with particularly large investments in Kraft Heinz, Wells Fargo, Coca-Cola, and IBM. In other words, Berkshire Hathaway is like buying a diversified investment portfolio all at once, and while Warren Buffett has said that the phenomenal returns of the past 50 years aren't likely to continue, I'm confident that the company will deliver market-beating returns for decades to come.
This bank could evolve into a dividend powerhouse (again)
Bank of America has come a long way since the financial crisis, and quite frankly is a steal at the current valuation of just 63% of its book value. In fact, I've added to my position recently, and Bank of America is now the largest bank holding in my portfolio.
Capital levels have improved significantly, and the bank has done a great job of controlling its expenses by making its operations more efficient. The bank's asset quality continues to improve, with the rate of non-performing loans falling by 24% over the past year alone.
In addition, Bank of America is emerging as a leader in banking technology, which could help with further expense reductions if the bank's online and mobile platforms continue to add to their user bases. Bank of America was recently ranked No. 1 in mobile banking functionality by Forrester, as well as receiving the top ranking in online banking functionality by Keynote, so it's encouraging to see how seriously they're taking this opportunity.
As a result of the improvement, Bank of America recently passed its annual stress test, which allowed the bank to increase its dividend by 50% and repurchase up to $5 billion of its own stock. With a dividend yield of just 2% right now, the bank is currently emphasizing buybacks to take advantage of the depressed valuation, but I believe Bank of America will become a dividend powerhouse in the not-too-distant future if things keep improving.
A rock-solid bank with room to grow
Canadian banks have historically been more stable than U.S. banks, and I particularly like Toronto-Dominion Bank as a long-term investment. The second-largest Canadian bank by assets, TD still has plenty of room to grow in the U.S., with its 1,265 locations concentrated along the east coast.
Although TD does have operations in investment banking and capital markets, more than 80% of the bank's revenue comes from easy-to-understand retail banking operations. The bank is a leader in customer service, and is known as "America's Most Convenient Bank" for its long hours and above-and-beyond service reputation.
TD has a history of aggressive growth while simultaneously maintaining smart risk management, a rare combination. Over the past decade, TD has produced annual average total returns of 9.9%-well ahead of its peer group's average, and the bank has been able to increase its dividend at a 12% annualized growth rate since 1995. With 7-10% annual EPS growth expected in the years ahead, there's no reason to believe the bank's 3.8% dividend yield won't continue to grow at an impressive rate.
Source: TD Bank earnings presentation
What exactly do I mean by "I'm never selling"?
When I say that I'm never selling these three stocks, it's important to point out that I have no intention of selling as long as my reasons for owning these stocks today continue to apply. If at some point in the future this isn't the case, it's entirely possible that I'll sell my shares.
After all, at one point, Warren Buffett's Berkshire Hathaway owned shares of Freddie Mac and ConocoPhillips. However, at the time Berkshire owned those stocks, the fundamentals of those businesses looked much different than they do today.
The bottom line is that there are plenty of legitimate reasons to sell, even when it comes to "forever stocks," but it's a good idea to approach investing with the intention of holding onto your stocks forever.
Matthew Frankel owns shares of Bank of America, Berkshire Hathaway (B shares), and The Toronto-Dominion Bank. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Wells Fargo. The Motley Fool recommends Bank of America and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.