Forever is a long time, yet longer is better with investing. But don't take my word for it; investing legend Warren Buffett once said, "Our favorite holding period is forever."
An extended time frame is advantageous. In the present, it's hard to know what a stock should be worth precisely -- and some other investor on the other side of your trade bets you're wrong. But if you've picked a business that can compound its value over time, the stock price increases accordingly, and your entry point becomes less relevant the longer you hold.
Forever stocks, however, are few in number. For example, many technology companies are out (in my opinion) since the product upgrade cycle is constant and it's hard to predict which will stay ahead of competitors. I'd also exclude some of the biggest large-cap companies since they're currently facing heightened regulation risks.
The three stocks I've picked have enduring businesses. But for a twist, I didn't pick any industry top dogs. Each of these companies plays second fiddle to a larger competitor. Nevertheless, I believe they can be calmly bought and held for a lifetime.
Visa is the top-dog in payment processing, but Mastercard ( MA 0.08% ) is still a worthy buy. In the future, I believe we'll use cash less than we do today, not more. And digital cash needs digital pipes to get money from A to B. Therefore, I believe payment-processing companies like Visa and Mastercard are likely to remain in style and grow revenue long term.
Here's why I prefer Mastercard to Visa: The company derives most of its revenue from international markets (66% in the second quarter of 2020). Outside of the U.S., it's a well-known and widely used brand. But if you stop and consider the percentage of the global population not currently participating in the digital-payment economy, the majority of them are outside of America.
Underserved people need access to banking, credit, and payment solutions. And if they can be brought in, Mastercard would be a primary beneficiary due to its prominent global presence. To that end, the company intends to connect 500 million people to the digital economy by 2025. This vision comes after already bringing that many in over the last five years. Additionally, it's pledging to help 50 million small businesses implement digital-payment systems.
Mastercard's revenue fell 17% year over year in Q2. This is mostly because people spent less -- the company needs spending volume. By bringing individuals and businesses into the digital-commerce era, payment volume should go up. Therefore, it's laying the foundation to continue growing its business while bettering the lives of the world's least-served people.
Few companies have returned as much as fast-food giant McDonald's over the decades, but I believe smaller rival Wendy's ( WEN 0.43% ) is the better buy-and-hold-forever stock today. I don't think food at either chain will ever go out of style. But growth options at McDonald's are few these days, given its size. By contrast, Wendy's has options to grow shareholder value.
For example, Wendy's just launched a breakfast menu. In the company's first full quarter of breakfast, the second quarter of 2020, it generated nearly $200 million in sales. That's an impressive start considering breakfast sales were slow in general with fewer people commuting to work in the morning. In time, breakfast could be a big part of Wendy's business, driving higher profits by taking better advantage of underutilized locations.
As a franchised business, Wendy's has strong cash flows that it can use for shareholder-friendly moves, including the dividend. In the past, management prioritized this, doubling the dividend from 2016 to 2019. With the coronavirus, the dividend was reduced temporarily and currently yields less than 1%. But if it returns to pre-coronavirus levels, the dividend yield would be just over 2%, not bad for a stable business with growth opportunities like this.
The Home Depot is the largest home-improvement retailer in the world, but don't overlook Lowe's ( LOW -0.73% ). Both companies' sails are filled by the same ongoing tailwind: We all need living spaces, and these spaces require upkeep. Whether it's building a new home, remodeling, or fixing something that broke, home-improvement retail is a forever necessity.
In reality, I think both companies can deliver positive shareholder returns over the long haul, but here's why I like Lowe's just a little bit more than Home Depot: Lowe's has almost as many locations as Home Depot (2,200 vs. 2,293), but Home Depot's revenue is around 50% greater. Clearly, Lowe's has a sales growth opportunity to capture. And perhaps it can, through its focus on improving its omnichannel distribution and on deepening relationships with professional customers.
If Lowe's can eventually go toe-to-toe with Home Depot, there's a lot of upside. If it can't, then I still think it can be a market-beating stock, just as it has been over almost any time span during the past several decades. Furthermore, Lowe's is a Dividend Aristocrat, having paid and raised the dividend without fail for over 45 years. Yet its payout ratio is still very low at 29%, leaving plenty of breathing room for future raises.