Investing in stocks can be an incredibly effective way to generate wealth, and one big reason why is the power of compound growth. But compounding can only really work its magic if you have the patience to buy and hold for the long term. Your goal should be to hang onto your stocks practically forever, unless your underlying investment thesis and conviction on the company changes.
To do that, you'll need to start by picking fundamentally solid companies with tangible growth catalysts. The five stocks below are perfect wealth-building candidates to buy and hold forever.
A reliable stock for all times
Canadian National Railway (CNI 0.10%) has quietly made massive profits for investors who've held the stock and reinvested dividends through the past couple of decades. The company has increased its dividend every year since 1995 at a compound annual growth rate (CAGR) of 16% through 2019.
Railroads haul one-third of U.S. exports and support nearly $220 billion in economic output each year. It's an essential industry and Canadian National's a leading player in it, operating the longest rail network in North America covering nearly 20,000 route miles, and the only one connecting the Atlantic, Pacific, and Gulf coasts.
Image source: Getty Images.
Canadian National is also an efficient and diverse railroad, moving goods from many vital commodity markets including petroleum, grains, metals, and forest products. The company pumped a record $3.9 billion Canadian dollars into capital investments last year and is upping its automation game. For example, its Autonomous Track Inspection Program, which uses artificial intelligence to monitor and test track parameters in real time, could reduce the need for manual inspections by 50%.
Canadian National's a well-established, well-run company in a critical industry, is investing in growth, and pays one heck of a dividend. That's a great package to own for a lifetime.
A resilient money-builder stock
American Water Works (AWK 1.69%) has made investors more money than you might think, thanks to a regulated business that has supported plenty of dividend growth. It provides water and wastewater services to 15 million customers across 45 states, and the rates its charges are set by public utility commissions. That makes the company's revenue and cash flow stable and predictable.
American Water's financial goals offer investors a great deal of insight regarding its medium-term prospects. Through 2024, it's targeting:
- 7% to 8% compound annual growth in its water rate base.
- 7% to 10% compound annual growth in earnings per share.
- 7% to 10% compound annual growth in its dividend.
- $8.8 billion to $9.4 billion in capital spending.
Regulated capital expenditures to win base rate approvals should be the key driver of earnings growth, supplemented by growth moves like acquisitions. And as its earnings grow, so should its dividend. Overall, that makes American Water a reliable company to invest in for long periods of time. And if you're a proponent of ESG investing, you might want to know that the utility recently scored the highest ESG evaluation rating in the U.S. from S&P Global.
A play on the future of energy
With much of the world in the midst of transitioning to greater use of clean energy sources, investors ought to play the trend -- and what better way to do that than to own a piece of the largest producer of wind and solar power, NextEra Energy (NEE 0.34%)? This company offers the stability that comes with a defensive utility stock combined with exponential growth potential.
Dividend growth largely drove NextEra stock's explosive total returns in the past: Its payouts grew at a compound annual rate of 9.4% between 2004 and 2019, underpinned by annualized growth in adjusted earnings per share of 8.4%. Those trends should continue, what with NextEra's visionary management consistently setting ambitious financial goals. For example, it's targeting high single-digit-percentage growth in adjusted EPS annually through 2023 and dividend growth in line with earnings.
NextEra Energy's renewables project backlog just crossed 15 gigawatts, which is more than its existing renewables capacity. That's a humongous growth in the pipeline, and with industry experts expecting trillions of dollars worth of investment in renewable energy in just the next decade, this stock is for keeps.
Don't miss this explosive secular trend
Like NextEra, Visa (V -0.48%) is riding a mega-growth secular trend: As the war on fossil fuels is propelling NextEra, the war on cash is lifting Visa.
The e-commerce boom and the digitization of major service industries like banking have triggered a major shift from cash to cashless modes of payments like debit and credit cards, online payments, and mobile wallets. Visa is already the world's largest payments processor, facilitating transactions between consumers, merchants, and financial institutions. In 2019, it had 3.4 billion cards in circulation across 200 countries, processed 553 million transactions per day, and generated $23 billion in revenue.
That's an enormous business, and this could be just the beginning. Visa is extensively using technologies like blockchain, and expanding into newer areas such as business-to-business and person-to-person payments, both of which are multitrillion-dollar addressable markets. Its value-added services like analytics and fraud management also provide it with tremendous growth opportunities.
With Visa's operating margins already north of 60% and with management targeting a dividend payout of 20% to 25%, patient investors could reap multibagger returns from this fintech stock.
A Dividend King that won't let you down
Johnson & Johnson (JNJ 0.67%) shares have done marvelously for long-term investors over the years.
Its clout in the consumer and healthcare sectors, a solid portfolio, brand power, impressive research and development, and an incredible dividend track record are just some of the things that have powered this company's returns upward. While the consumer side of the business -- which includes household names like Band-Aid, Neutrogena, and Listerine -- is a consistent cash-flow generator, Johnson & Johnson consistently scouts for growth in healthcare. That's exemplified by its latest acquisition -- autoimmune disease-drug specialist Momenta Pharmaceuticals, for which it paid $6.5 billion in cash. In 2019, Johnson & Johnson generated half its revenues from pharmaceuticals and one-third from medical devices.
Can Johnson & Johnson still build wealth for new investors? Sure it can, if you hang on to the stock. The company continues to prioritize R&D spending and has a humongous biotech pipeline. While these stories play out, you can collect rising dividend payouts year after year: Johnson & Johnson is a Dividend King, having boosted its payouts annually for 58 straight years. Shareholders can reinvest those dividends, then just sit back and watch their money grow.
