When compared to bonds and commodities, stocks have run circles around other asset classes over extended periods. But over very short time frames, Wall Street's performance can be hit-and-miss. The bear market all three major U.S. stock indexes endured in 2022 serves as a perfect example.
As much as investors might not like to admit it, stock market corrections, crashes, and bear markets are a normal part of the long-term investing cycle and the price of admission to one of the world's top wealth creators. Nevertheless, the velocity and unpredictability that accompanies big moves lower in the market can be scary and cause investors to question their desire to stay the course. That's where boring stocks come into play.
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A "boring stock," as I'm defining it, is a company that gets the job done year in and year out. It may not be a fast-growing company or find itself on the cutting edge of innovation within its particular sector or industry, but boring companies tend to be highly profitable leaders that can deliver in virtually any economic environment. They're the types of businesses investors should want to own when volatility and unpredictability arise on Wall Street.
There are three well-known boring stocks that have one thing in common: They've consistently made their shareholders richer over the years, no matter what Wall Street has thrown their way.
Costco Wholesale: A positive total return in 18 of the past 21 years
The first boring stock that's seemingly done nothing but make its shareholders money for more than two decades is none other than warehouse club Costco Wholesale (COST 0.17%). Except for 2002, 2008, and 2022, Costco has delivered a positive total return, including dividends paid, to its shareholders in 18 of the past 21 years. In aggregate, Costco shares are up more than 1,520% since the start of 2002, inclusive of dividends paid.
One of the reasons Costco has averaged a roughly 14% total annualized return since the beginning of 2002 is because it's a consumer staples stock. It carries groceries, toiletries, and everyday products that consumers are going to need no matter how the U.S. economy performs. Catering to basic necessity goods is an easy way to get consumers into its stores, and it tends to generate highly predictable operating cash flow.
Another reason for Costco's success is the company's ability to throw its proverbial weight around. Due to its size and deep pockets, Costco is able to purchase many of its products in bulk. Buying more of a product allows the company to negotiate a lower per-unit cost basis, which it can then pass along to its members in the form of a lower price. Being able to consistently undercut traditional grocery stores and retailers on price has been a lure that Costco's shoppers can't ignore.
But the biggest differentiator for Costco Wholesale continues to be its membership model. These memberships, which start at $60 annually, are high-margin and help the company offset the razor-thin margins it dangles in front of consumers on grocery items. Annual membership fees and a few discretionary purchases from shoppers is all it takes for Costco to continually be a winner.
Although Costco's stock is exceptionally pricey, given the growing likelihood of a U.S. recession, history shows that it hasn't let patient investors down.
UnitedHealth Group: A positive total return in 19 of the past 21 years
A second boring stock with a rich history of making its shareholders richer is insurance and healthcare services company UnitedHealth Group (UNH 0.23%). Except for 2006 and 2008, UnitedHealth has generated a positive total return for its shareholders in 19 of the last 21 years. The roughly 3,300% total return since the beginning of 2002 works out to an annualized rate of return of roughly 18%.
One factor working in UnitedHealth Group's favor is the defensive nature of the healthcare sector. As much as we'd like to simply not get sick when it's not financially convenient, we don't have that choice. Demand for everything from health insurance to prescription drugs and healthcare services tends to be pretty steady in any economic climate.
UnitedHealth Group is probably best known for its health insurance offerings. Though the passage of the Affordable Care Act (ACA) in 2010 required insurers to accept people with preexisting conditions, the ACA hasn't done much to diminish the premium pricing power of health insurance companies. This combination of strong premium pricing power and continuing to add new Medicare Advantage users is steadily moving the needle higher for the company's insurance operations.
However, UnitedHealth Group's clearest growth driver has been its Optum subsidiary. Optum is primarily a healthcare services company that provides everything from prescription refilling services for pharmacies to software solutions for medical organizations. Not only has Optum's sales growth rate pretty consistently outpaced the organic sales growth rate of UnitedHealth's insurance segment, but the operating margin associated with Optum has typically been superior, too.
With shares currently valued at less than 20 times Wall Street's consensus earnings forecast for 2023, additional upside is possible, if not likely.
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NextEra Energy: A positive total return in 19 of the past 21 years
The third boring stock that has an exceptional history of making its shareholders richer is electric utility NextEra Energy (NEE 0.54%). Aside from 2008 and 2022, NextEra has delivered a positive total return the other 19 years since the beginning of 2022. In terms of aggregate return, NextEra shareholders are sitting on gains of just shy of 2,000% since Jan. 1, 2002.
A key reason for these steady gains is because NextEra Energy provides a basic necessity service (electricity). If you own or rent a home, there's a pretty good chance you're using electricity to power your appliances. Further, most electric utilities operate as monopolies or duopolies in the areas they serve. In short, cash-flow generation for electric utilities is very predictable from one year to the next.
What truly separates NextEra from its peers is the company's focus on renewable energy projects. As of the end of March 2023, it had 67 gigawatts (GW) of energy-generating capacity in operation, 31 GW of which was tied to clean energy. The 23 GW derived from wind power and 5 GW from solar power are both tops in the world.
Although investing in green-energy projects isn't cheap, the rewards have been bountiful. NextEra's electricity-generation costs have fallen, which has boosted the company's average annual adjusted earnings growth to more than 8% since 2007. Comparatively, most electric utilities grow by a low-single-digit percentage. NextEra anticipates completing between 32.7 GW and 41.8 GW of new renewable projects between the start of 2023 and end of 2026.
The icing on the cake here is that NextEra Energy's traditional utility operations (those not powered by renewable sources) are regulated. While this does mean it can't raise rates on consumers anytime it pleases, it also ensures the company won't be exposed to potentially unpredictable wholesale electricity pricing.
