There are no absolute guarantees in the world of investing. A company that looks like a can't-miss investment can suddenly turn south. However, there are some companies that have a relatively good chance at producing compounded returns over the long haul and thus building wealth for you. The key, of course, is finding those kinds of stocks.
So we asked three of our investing contributors to each highlight a stock they see as likely to provide returns throughout someone's lifetime. Here's why they picked Brookfield Property Partners (BPY), Hormel Foods Corp. (HRL -0.06%), and Canadian National Railway (CNI 0.27%).
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A high-yield real estate stock for the long haul
Matt DiLallo (Brookfield Property Partners): Brookfield Property Partners is an excellent option for income seekers. The global real estate giant owns a diversified portfolio of high-quality commercial properties that it leases to tenants under long-term agreements. Those contracts generate predictable cash flow for the company, the bulk of which it distributes back to investors. The stock currently yields nearly 5%, which is a rock-solid payout that investors can count on for the long-term.
Several factors support the view that Brookfield Property Partners can consistently send cash back to investors. First, the company has a conservative financial profile since it only pays out about 80% of its cash flow, while most other real estate companies are comfortable paying out more than 90% of their cash flows. The company also has a top-notch balance sheet: For one thing, it keeps its debt to about 50% of the capital invested in its properties, which is less than most other real estate companies. By retaining cash and having an investment-grade balance sheet, Brookfield has the financial flexibility to build and buy more income-producing properties that will further solidify the payout. This discipline supports the outlook that the company can increase its distribution to investors by 5% to 8% per year.
Brookfield has built a global real estate powerhouse, which should generate a steadily growing income stream for investors in good times and in bad. That makes it a dream stock for those looking for an income producer to own for the long haul.
On sale -- don't wait
Reuben Gregg Brewer (Hormel Foods Corp): Hormel has increased its dividend annually for 51 consecutive years, a record very few companies have achieved. Management has stated quite clearly that it has no intention of letting the streak end. That's true even though food makers like Hormel have been under extreme pressure as consumer buying trends shift.
HRL Dividend Yield (TTM) data by YCharts.
To be honest, Hormel's recent results have been relatively weak. Concerned investors have pushed its shares down 30% from their 2016 highs. And the yield is now over 2.1%, toward the high end of the company's historical yield range. If you have the stomach for a little near-term volatility, now looks like a decent time to buy Hormel. One compelling reason is that the company has been aggressively adjusting its business through bolt-on acquisitions to change with its end customers.
Those purchases are notable because they show Hormel's dedication to managing its portfolio. That's how a food company gets to 51 years of dividend hikes. Assuming this game plan plays out like it has before, you'll be able to keep collecting dividends for years into the future without a concern. And if you buy now, you'll be getting a relatively high yield.
There's one more interesting fact here. The Hormel Foundation, a charity, owns 48.49% of the company's shares. A dividend cut wouldn't just upset you, it would upset a huge shareholder that is reliant on the dividend to fund its philanthropic endeavors. No wonder management is so committed to the dividend.
Keeping your portfolio chugging along for decades
Tyler Crowe (Canadian National Railway): No matter how much we try to innovate and disrupt the transportation industry, railroads remain the most cost-effective way to move goods by a long shot. The longer the distance, the greater the advantage for rail. So unless we are able to develop some sort of Star Trek-like beaming device, then an investment in rail is going to remain one of the most likely ways to enjoy the benefits of compounded returns for the rest of your life.
When it comes to picking the best railroad stock, it's hard to build a case for any other company than Canadian National Railway. With the only rail network in North America that touches the Atlantic, Pacific, and Gulf Coasts, it has the long-haul capabilities that make transporting via rail so attractive in the first place. It also just happens to run the most cost-effective operation in the railroad industry. Its attractive rail network and low-cost operations are the driving force behind its ability to generate gobs of free cash flow and returns on equity in excess of 20%. With all that cash and high rates of returns, management has been able to consistently pay an increasing dividend and buy back stock.
CNI Average Diluted Shares Outstanding (Quarterly) data by YCharts.
Canadian National Railway is never going to blow you away with double-digit revenue growth or flashy quarterly results. Instead, it is going to leverage its network and efficient operations to steadily grow earnings per share. So unless we can send goods across large distances by teleportation, I'm willing to bet that Canadian National Railway will be able to pay you for the rest of your life.
