Wall Street likes to focus on one-year price targets. I don't have much use for that.
In part, that's just because I'm lazy. When I invest in a company, I like to get to know it, and I sink a good amount of time reading SEC filings, examining the financials, and figuring out what makes the business tick. I don't relish the idea of starting this process from scratch at the beginning of every year.
A five- or 10-year price target is more my speed. Heck, stretching that out to 30 years sounds like a lazy investor's paradise. But is that even possible? Can an investor really buy any stock with an eye towards holding it for three decades?
Three-decade dynamos
Assuming we want to figure out what stocks are worth holding for the next 30 years, a good starting point might be a look back at the last 30 years. Here are the top 10 performing stocks -- based on dividend-adjusted returns -- over the past three decades.
|
Company |
Dividend-Adjusted Returns, 1/1/1981 to 1/1/2011 |
Annualized Return |
|---|---|---|
| Leucadia National (NYSE: LUK) | 60,628% | 23.8% |
| AFLAC | 51,845% | 23.2% |
| Gap | 48,929% | 22.9% |
| Hasbro | 42,333% | 22.3% |
| Raven Industries | 38,440% | 22% |
| Wal-Mart Stores | 29,028% | 20.8% |
| Valspar | 27,174% | 20.6% |
| Altria (NYSE: MO) | 25,293% | 20.3% |
| Family Dollar | 21,481% | 19.6% |
| Vornado Realty | 21,446% | 19.6% |
Source: Capital IQ, a Standard & Poor's company.
The next 30-year winners
A look back like the table above is only really useful if we can pull some lessons from the past winners to help us find future winners. Here are three that I think we easily take away from this group:
- They serve basic markets.
- They paid dividends.
- They required investor patience.
There could definitely be an argument for adding "small size" to the list, but I don't think we should be too quick to dismiss larger companies. Altria was a large company in 1981, and Wal-Mart was no small fry. Also, many of the very largest companies have performed admirably over this stretch.
- Exxon Mobil returned 4,993%, or 14% per year
- Merck returned 3,725%, or 12.9% per year
- Johnson & Johnson returned 6,149%, or 14.4% per year
On the basis of profits, in 1981 Exxon held the No. 1 spot on the Fortune 500, while Merck and J&J were 40 and 44, respectively.
Three steps to long-term excellence
Serving basic markets is important, because if we're looking at a company that operates in too small of a niche, there's a much higher likelihood that it will hit a ceiling as it tries to grow.
Wal-Mart and Family Dollar sell consumer basics at rock-bottom prices. Hasbro sells a wide variety of toys and games. Vornado owns prime commercial real estate. These are very basic businesses whose goods and services were in demand 30 years ago, and 30 years before that, and remain in demand today.
All of the companies in the table above also enhanced shareholder returns through dividends. The most obvious is Altria, whose non-dividend-adjusted return of 1,266% looks very meager compared to its dividend-adjusted gains.
But while the dividends do help enhance returns, they also typically say some very positive things about a company. Dividends show that companies have a stable, cash-generating business, and that management is making sure that investors benefit from the company's success.
Finally, a glance at the long-term charts for the stocks above reveals that over the past three decades, there were ups, there were downs, and there were periods where not a whole lot happened. But despite the intervening squiggles, each company posted undeniably positive end results -- at least for the investors who stuck around.
Five 30-year picks
We'll want to find companies that will still be going strong even after 30 years. So while valuations aren't meaningless, getting a rock-bottom price shouldn't be our No. 1 concern.
To begin winnowing down the massive field of available stocks, I looked for stocks that pay a dividend of at least 1%, and have a trailing price-to-earnings ratio of less than 20. From there, I simply looked for businesses that I could easily see still kicking butt in 2041.
|
Company |
Products / Services |
Dividend Yield |
Price-to-Earnings Ratio |
|---|---|---|---|
| Procter & Gamble (NYSE: PG) | Gillette, Tide, Crest, Old Spice, Pampers, and many more | 3.3% | 17.2 |
| PepsiCo (NYSE: PEP) | Pepsi, Tropicana, Frito-Lay, Gatorade, and many more | 2.9% | 17.2 |
| Medtronic (NYSE: MDT) | Wide variety of medical devices | 2.2% | 13.6 |
| Public Service Enterprise Group (NYSE: PEG) | Diversified utility | 4.4% | 10.1 |
| TJX (NYSE: TJX) | T.J. Maxx, Marshalls, HomeGoods | 1.5% | 15.9 |
Source: Capital IQ, a Standard & Poor's company.
With these five companies, I believe we have the first two points of my list covered: They all serve basic markets, and each pays a dividend. As to the final point, investor patience -- well, that's up to you. In the era of 24-hour financial news and one-year price targets, thinking about buying a company to hold for 30 years may seem pretty Foolish. But that's usually a good thing.
Of course, if you're considering making that kind of commitment to a stock, you probably want to get to know it pretty well beforehand. You can do so by adding prospects to your Foolish watchlist. Click the "+" signs above to add any of the companies listed, or start a brand new list.
