When choosing stocks for my retirement portfolio, I look for stocks that I never plan to sell. I want companies whose businesses will survive and grow for generations to come, producing decades of compound gains. With that in mind, here are three stocks I own that I plan to hang onto forever. Here's why I own each, and why you might want to consider them, as well.
Retail that you don't have to worry about
People who read my articles frequently know that I'm a big fan of real estate investment trusts (REITs) as long-term investments. The combination of property appreciation, income generation, and tax benefits can produce some impressive returns over the years. And if I had to pick a single favorite REIT, I'd have to say it would be Realty Income (NYSE:O).
Realty Income primarily invests in freestanding (single-tenant) retail properties, with smaller concentrations of office, industrial, and agricultural properties. And the primary reasons I love Realty Income as a long-term investment are for its recession- and competition-resistant portfolio, and its defensive lease structure.
The majority of Realty Income's tenants can be classified into one or more of three categories:
- Non-discretionary retail (drug stores, gas stations): These businesses sell things that people need, and tend to hold up better during recessions than discretionary retail.
- Service-based businesses (fitness centers, movie theaters): Businesses that people need to physically go to are virtually immune to e-commerce competition, a serious threat to many retail businesses.
- Deeply discounted retail (dollar stores, warehouse clubs): Businesses that sell low-priced items not only survive recessions, but actually tend to grow during tough times.
Realty Income's tenants sign net leases with initial terms of 15 years or more, which reduces turnover and vacancy risk. In fact, Realty Income's occupancy is 98.3% and has never fallen below 96%. These leases require the tenants to cover such variable expenses as property taxes, building insurance, and maintenance, which results in steady, predictable rental income for years.
A little bit of everything
Sure, it's nice to know that Warren Buffett is essentially investing your money for you, but this shouldn't be the primary motivation for new investors to buy Berkshire. After all, Buffett is 86 years old and could potentially decide to retire at any time.
Instead, the reason to invest in Berkshire is for its time-tested business model of investing in entire companies and using the cash generated to add value for shareholders, both through further acquisitions and common stock investments.
Berkshire's primary business is insurance, which it conducts through subsidiaries such as GEICO. It also owns companies in a variety of industries, including household names such as Fruit of the Loom, The Pampered Chef, and Duracell. In addition, Berkshire has a common stock portfolio that's full of some of the best companies in the market. In fact, Buffett has referred to Berkshire's willingness to invest its cash in common stocks as one of the company's major competitive advantages, and I agree.
In a nutshell, Berkshire Hathaway is like buying a diverse portfolio of well-run companies, all in one stock.
Growing demand and defensive properties
The U.S. population is aging -- fast. Over the next 30 years, the 65-and-older age group is expected to roughly double. This will create increased demand for healthcare facilities, particularly those that cater to the needs of senior citizens.
One smart way to capitalize on this trend over the next few decades is with a healthcare REIT like HCP (NYSE:HCP), which specializes in private-pay senior housing, medical office, and life science properties.
In addition to the demographic trends in favor of industry growth, healthcare real estate is an inherently defensive property type. During recessions, people can stop spending money on vacations and designer clothing -- but they still have just as much need for healthcare as during prosperous times.
Last year, HCP spun off its most risky assets into a newly created REIT, and now has lower debt, more stable assets, and more flexibility to grow responsibly than it did before. With its current portfolio, HCP should be able to generate consistent, growing income, and should be able to find ample expansion opportunities in the coming decades. Prior to the spinoff, HCP increased its dividend for more than 25 consecutive years, and if the company sticks to its current plan, another 25 years of growth are a very strong possibility.
"Our favorite holding period is forever"
This is one of my favorite Warren Buffett quotes, and seemed appropriate to include in a discussion of stocks you can hold forever -- especially since one of them is Berkshire Hathaway. What Buffett means is that he approaches every investment with the idea that he could hold it forever, but not that he necessarily will. In fact, Buffett sells stocks regularly, and for a variety of reasons.
My point is that, while these stocks look like great "forever" investments right now, that doesn't mean you should just buy them and forget about them. I actually own all three, and read every quarterly report these companies release -- not just because it's part of my job, but to make sure my original reasons for buying these stocks still apply.
Matthew Frankel owns shares of Berkshire Hathaway (B shares), HCP, and Realty Income. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.