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Investing in high-quality dividend stocks is one of the most certain ways to create wealth over the long term. However, there are only a handful of stocks that qualify as "forever" investments, or those investments that will almost certainly remain profitable and stable for decades to come.
One stock that definitely qualifies here is National Retail Properties (NNN +0.36%), a real estate investment trust (REIT) specializing in commercial properties. Here's what makes a stock a "forever" stock, and why National Retail Properties qualifies.
What is a "forever stock"?
When evaluating a dividend stock that I plan to hold forever, I look for three basic characteristics.
First, the company's business must be easy-to-understand and easy to execute. You should be able to explain what the company does in a sentence or two, and the company must be able to do it no matter what the market is doing or who is in charge of the company.
Next, the company needs to have an excellent dividend history, including regular dividend increases and the potential for further increases in the future.
And finally, to borrow a principle from Warren Buffett, the company needs to have a "wide moat." What this means is that the company must have a distinct advantage that differentiates it from others, and that will allow its success to continue for decades into the future.
Why National Retail Properties is a forever stock
Let's first take a look at the characteristics I described above. National Retail Properties has a fairly simple business model -- buy highly desirable commercial properties, and lease them to stable, nationally known retailers. Some of the company's top tenants are 7-Eleven, AMC Theaters, SunTrust Banks, and Best Buy.
In terms of the dividend history, National Retail Properties is about as stable as it gets. In fact, the company is a Dividend Aristocrat, which means that it has increased its dividend annually for more than 25 consecutive years.
Most importantly, the reason National Retail Properties is a forever stock is the stable, growing nature of the business itself. Its size gives it the competitive advantage of economies of scale, which includes things like a lower management cost and less vulnerability to issues involving any one of its properties. In other words, a company that owns 50 properties might feel a sting if a few of them unexpectedly become vacant. However, a company like National Retail Properties with more than 2,000 properties would be just fine.
National Retail Properties' "wide moat"
The company's size also makes it less vulnerable to weakness in any particular company or industry. National Retail's property portfolio is leased to more than 400 different tenants that operate in 38 different industries. So, if say, electronic retailers were having a tough time, it would only threaten a small percentage of National Retail's income.
As far as safety and stability is concerned, the commercial real estate business is remarkably stable. Tenants sign long-term leases (15-20 years), and the company currently has 12 years remaining on its average lease. Combined with a remarkable 98.6% occupancy rate (10-year low of 96.4%), there is very little turnover or unexpected vacancy to deal with.
Another advantage is the "triple-net" leases all of National Retail's tenants are on. Under this type of lease, the tenants are responsible for virtually all of the variable costs associated with owning properties, such as taxes, insurance, utilities, and building maintenance.
The proof is in the performance. Not only does National Retail Properties outperform the market and other REITs, they have done it consistently for an exceptionally long period of time. During the past 25 years, National Retail has averaged total returns of 15.9% per year, handily beating the equity REIT average of 11.2% and the S&P 500's average of 9.6%.
To put those numbers in perspective, consider that a $10,000 investment in an S&P 500 index fund 25 years ago would be worth about $99,000 today, while the same investment in National Retail Properties would have grown to more than $400,000. Now, past performance is not a guarantee of future results, but it's hard not to respect this kind of consistency.
When to buy?
The best thing about forever stocks is that it's almost always a good time to buy. Over the past few weeks, shares of most REITs, including National Retail Properties, have dropped considerably, mainly because of interest rate fears.
However, don't let this scare you off. Very little of National Retail Properties' debt has a variable rate, so the pain that rising rates could cause is rather limited.
Plus, since this is the type of stock you can hold forever, you can gradually buy shares and let the magic of dollar-cost averaging work for you. Basically, this means buying a set dollar amount of shares at regular intervals. So, when the stock price is expensive, you'll buy fewer shares, and when the price is cheaper, you'll buy more shares. Over time, the laws of mathematics guarantee you'll pay a lower average price than if you buy a set number of shares each time.
When you identify a stock you want to own forever, whether it's National Retail Properties or another, don't try to time the market. Over time, no matter when you get in, you'll make money over the long run.
