Investing for the long term is one of the most effective ways to create lasting generational wealth. This is primarily due to the power of compounding returns, which allows investments to grow over multiple decades and across different generations.
Over short periods, the effect of compounding is minimal, but over decades, that growth can become exponential. If you're looking for two stocks to buy and hold for the long run that can aid in your wealth-building journey, here are two names to consider.
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1. Microsoft
Microsoft's (MSFT 0.53%) dominant market position, diversified and high-margin business model, leadership in high-growth areas like artificial intelligence (AI) and cloud computing, and financial fortitude have made it a great stock to buy and hold for decades. The company is one of just two in the U.S. (the other being Johnson & Johnson) that boasts the top-tier AAA credit rating, which signifies its exceptional financial strength, robust cash flow, and low default risk.
Microsoft has a wide range of revenue streams across its productivity software, cloud computing, personal computing, and AI solutions. Many of its products are deeply integrated into the daily operations of businesses and consumers in a way that makes its services mission-critical and imposes high switching costs. Azure is the second-largest cloud provider in the world and a primary growth engine, with its revenue now driven by both traditional cloud migrations and explosive demand for AI workloads.
Through its strategic partnership with OpenAI, Microsoft has integrated AI capabilities (like Copilot) across its product suite to enhance its existing offerings and create new monetization opportunities. This first-mover advantage in monetizing generative AI has given Microsoft a significant competitive edge that the company continues to capitalize on.
NASDAQ: MSFT
Key Data Points
Microsoft also benefits from a wide economic moat built on its brand strength, intellectual property, and strong network effects. It's also a cash-generating giant with an excellent balance sheet. The company has raked in $105 billion in profits and $53 billion in free cash flow over the trailing 12-month period alone.
Microsoft has a proven track record of adapting to changing markets and surviving economic downturns (e.g., the dot-com crash and the 2008 financial crisis). Its strong financial position and diverse business have acted as a buffer against volatility and made it a resilient, long-term holding.
Microsoft also has a long history of rewarding investors with a steadily increasing dividend (over 20 consecutive years of increases) and substantial share repurchase programs. While its yield is less than 1%, this is partly due to the high performance of the stock (which has delivered a return upwards of 130% over the trailing five years). If you want a no-brainer stock to buy, hold, and add to again and again through the years as you seek to construct a wealth-building portfolio, Microsoft looks like a great contender to consider.
2. Costco
The crux of Costco's (COST 0.30%) success is its membership model, where its recurring annual fees account for the vast majority of its operating profit. These fees provide a highly predictable and high-margin revenue stream that's largely insulated from typical retail sales volatility and economic downturns.
In fact, Costco maintains impressive membership renewal rates that regularly exceed 90% in the U.S. and Canada. This loyalty is driven by the company's commitment to offering high-quality products at extremely low prices, which incentivizes members to shop frequently and ensures a stable customer base.
By selling a limited selection of products in bulk and operating a highly efficient supply chain (e.g., using warehouse stores for both retail and storage), Costco achieves massive economies of scale and significant negotiating leverage over suppliers.
NASDAQ: COST
Key Data Points
The savings are passed to the customer. The ability to buy a wide range of items in bulk at lower prices than are available at other retailers is a sticky value proposition in all economic environments.
The company has a history of strong cash flow generation, low debt, and a healthy balance sheet. It has increased its regular quarterly dividend for over 20 consecutive years and occasionally pays large special dividends to reward long-term shareholders.
Costco looks like a great stock to buy for investors who want to gain exposure to the retail space by investing in a profitable, resilient business. Its total return of 150% over the last five years and its consistent dividend history more than compensate for its lower yield of less than 1%.
