"Our favorite holding period is forever" is one of my all-time favorite Warren Buffett quotes, as it sums up the ideal of long-term investing. When you're weighing a stock, ask yourself: "Can I see myself still owning these shares in 20 years? What about 50 years?"
There are many qualities that can make a stock a good "forever" investment. Maybe the business can hold up in any economy, good or bad. Or maybe the revenue stream is diverse and steady. Here are three stocks from my own portfolio that I intend to hold for as long as I'm an investor.
The right kind of retail
I'm a big fan of real estate investment trusts, particularly those with a long track record of smart execution and market-beating performance. One of my favorites is National Retail Properties (NNN 4.01%), which invests in single-tenant freestanding retail properties.
Many investors consider retail to be risky, and that's somewhat true. There have been several high-profile retail bankruptcies, and many others are struggling to stay above water. However, National Retail invests in a certain type of retail. Most of its properties are occupied by non-discretionary or service-based retail businesses, both of which face little threat from online competition because their goods and services still demand physical locations for consumers to visit. Consider National Retail's five largest business types:
- Convenience stores (16.8% of the portfolio)
- Full-service restaurants (11.2%)
- Limited-service restaurants (7%)
- Automotive service (6.9%)
- Family entertainment centers (5.4%)
This is the reason National Retail Properties has an industry-leading 99.1% occupancy, which hasn't fallen below 96.4% in recent history, even during the financial crisis. The company uses long-term (15- to 20-year) "net" leases, which generally have rent increases built in and require tenants to pay variable costs such as property taxes, building insurance, and maintenance.
Source: NNN company presentation.
This business strategy results in consistent market-beating performance. National Retail Properties has averaged a 14.8% total return over the past 25 years and has increased its dividend every year during that time.
A ready-made portfolio in just one stock
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is the one stock in my portfolio I'm most confident that I'll actually hold forever.
The reasons are simple. Most importantly, Berkshire Hathaway is like a complete investment portfolio all in one. The company has a long list of subsidiary companies that includes GEICO, The Pampered Chef, and Fruit of the Loom. And you get Berkshire's rock-solid portfolio of about four dozen stocks, some of which are pretty large holdings. Just to name a few of Berkshire's stock holdings:
|
Company |
Ticker Symbol |
Berkshire Stake |
Market Value |
|---|---|---|---|
|
Wells Fargo |
WFC |
9.2% |
$23 billion |
|
American Express |
AXP |
15.6% |
$8.3 billion |
|
DaVita HealthCare |
DVA |
18.2% |
$2.5 billion |
|
Deere & Company |
DE |
7.2% |
$1.8 billion |
|
International Business Machines |
IBM |
8.3% |
$10.6 billion |
|
Coca-Cola |
KO |
9.2% |
$17.6 billion |
|
Kraft Heinz Co. |
KHC |
26.8% |
$24.2 billion |
|
Phillips 66 |
PSX |
14.3% |
$5.9 billion |
Berkshire has delivered incredible returns to investors over the past 50 years, and I don't realistically expect anything close to that over the next 50 years. The company has simply gotten too big to sustain that level of growth. Even Buffett said so in the company's most recent letter to shareholders. However, I look at Berkshire as a bulletproof company with the potential to beat the market for decades to come.
A different kind of tech company
Another of my "forever" stocks is data center REIT Digital Realty Trust (DLR 3.64%). While this is the newest of the three companies mentioned here (IPO in 2004), it has delivered impressive results so far, and the industry trends show that Digital Realty's best days could still be ahead of it.
Global IP traffic is expected to grow at an annual rate of 23% through 2019, and cloud data center traffic is growing even faster at 32% per year. Basically, as people store more data in the cloud, all of that data will need to be stored somewhere, and that's where Digital Realty comes in.
Basically, Digital Realty builds data centers and leases the space out to more than 1,000 customers, including a who's-who of the tech and financial world. Facebook, Oracle, IBM, AT&T, and JPMorgan Chase are all among Digital Realty's largest tenants. The property portfolio is currently 93% occupied, and data center tenants tend to renew their leases more than other types of properties.
This business model seems to be working. Digital Realty's properties generate higher rates of return than those of its REIT peers, and the stock pays an above-average dividend. The company has grown its FFO per share by an average rate of 14.2% per year -- well above other leading REITs. In fact, Digital Realty just announced its 11th consecutive dividend increase, which has grown at a 14% average rate since the IPO. Impressively, Digital Realty has done this with a relatively conservative balance sheet. The company has less debt relative to its EBITDA than its peers, and its interest coverage is higher as well.
Something to keep in mind
Although you may buy stocks like these with the intention of holding them forever, you should still monitor any company's progress regularly. As I mentioned earlier, Buffett likes to hold stocks forever, but even he sells holdings from time to time.
A great example is Buffett's investment in Freddie Mac in the 1990s. Berkshire built a huge stake in the company, because at the time it made sense to Buffett as a long-term investment. In 2000, however, he felt the company was being too shortsighted and risky, so he pulled the plug, locking in a nice profit. We all know how Freddie Mac turned out in the years that followed.
My point is that just because a stock looks like a "forever" investment right now doesn't mean this will always be the case. If the reasons you loved a stock in the first place no longer apply, move on.
