When seeking stocks that can power your portfolio for years to come, focusing on well-run companies that have sustainable competitive advantages should be your guiding principle. Owning just a handful of stocks that regularly deliver strong performance can have a huge impact over the long term and make your portfolio into a wealth-generating machine.
For this roundtable discussion, we put together a panel of three Motley Fool contributors and asked each one to profile a stock that they believe is strong enough to serve as a pillar in your portfolio. Read on to see why they identified Boeing (BA -2.87%), Costco (COST 0.17%), and Walt Disney (DIS 0.18%) as stocks worth building a portfolio around.
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Monopolies are great -- but this oligopoly could be even better
Rich Smith (Boeing): If you're looking for one stock to build your portfolio around -- one great company you can count on to hold its value over time while paying you a steady dividend -- I can't think of a better place to start than Boeing.
In business for more than a century, Boeing clearly has staying power. This company isn't going to disappear until someone invents a better way to move quickly over long distances across large bodies of land and water. And while Boeing doesn't have a monopoly on building planes, it arguably has the next best thing: an oligopoly between it and its rival Airbus, which between them account for roughly 88% of all commercial aircraft revenue.
That's job security. No one's displacing Boeing from this business anytime soon.
Speaking of security, you can feel safe owning Boeing, and confident that your 2% dividend checks will keep coming year in and year out. With $13.6 billion in annual free cash flow to back up its $10.5 billion in reported earnings, you know that Boeing's earnings are of exceedingly high quality, and more than sufficient to cover the dividend. Boeing's payout ratio, in fact, is a very low 38%, meaning that only 38% of earnings suffice to pay the entire dividend.
It's precisely the kind of stalwart stock you want to build a portfolio around.
Check out the latest earnings call transcripts for Boeing, Costco, and Disney.
Save room in your cart for Costco
Demitrios Kalogeropoulos (Costco): Pricing power is important in differentiating great businesses from their not-so-great peers. This past year demonstrated for investors -- yet again -- that Costco excels in this arena.
The warehouse retailing giant's customer traffic spiked higher, and membership renewal rates inched toward a record peak in 2018 despite intense competition from e-commerce giants and from physical rivals like Walmart (WMT 1.32%) and Target (TGT -0.70%). Costco soaked up market share in this environment even though it recently raised the annual fees it charges its members.
That success helps explain how Costco could more than double its annual operating income over the last decade while profits for Walmart and Target have declined. Yet the better news for shareholders is that this selling setup forms a deeper moat around the business, with rising membership fees translating into lower prices -- which drive market-share gains and produce more membership growth.
Costco's winning ways are no secret on Wall Street, which is why the stock almost always attracts a premium valuation. But by shelling out a bit more in terms of expected profits, investors get to own a gem of the retailing business -- one that sports predictable and stable revenue and earnings streams.
A magical profile
Keith Noonan (Disney): Technologies and fashions change, but increasing demand for compelling entertainment content has been a remarkably consistent trend over the last century. Disney's strength in content makes it a standout candidate to play a foundation-level role in an investment portfolio, and its stock remains attractively priced for long-term investors.
Shares trade at roughly 16 times this year's expected earnings, a non-prohibitive valuation that leaves considerable room for growth when placed in the context of the company's push into streaming, the strength of its theme parks business, and the incredible depth of its stable of franchise properties. Disney already has a strong grip on the movie biz, capturing roughly 26% of American box office sales in 2018. And the company's integration of key Twenty-First Century Fox film and television properties following the close of a $71 billion acquisition makes it far and away the leader in the entertainment content space.
Disney's dividend is also worth paying attention to. While shares yield roughly 1.6% at current prices, the company has more than doubled its payout over the last five years. The big Fox deal could cause Disney to pursue slower payout growth, and the company's last hike of 4.8% did mark a meaningful deceleration. However, the House of Mouse is a cash-generating machine, and the cost of covering its forward distribution is coming in at just 28% of trailing free cash flow.
With a business that's built to last, earnings multiples that still leave plenty of upside potential, and a growing dividend, Disney is worth building a portfolio around for long-term investors.
