What makes a stock worth holding for decades?

Last week I toyed around with a little game – which stock we would all choose if we had to hold for 50 years.

Essentially, which company do we think will return us the most money in the form of dividends over the next 50 years?

Thank you all so much for getting back to me.

I received a ton of really interesting answers, some of which I’d like to share with you, before talking through where I’d be looking myself.

I found it really interesting reading your responses. Some common themes came up, as well as some niche ideas.

The stocks which came up the most weren’t too surprising. Unilever, Procter & Gamble, BP/Shell, and Coca-Cola…

Unilever and Coca-Cola are the classic examples.

No one can compete with Cola at the moment. It is irreplaceable in many people’s eyes. A premium cola with higher quality ingredients wouldn’t have the same appeal, nor do the cut-price own-brand ones which supermarkets offer.

Unilever carries a similar approach, but diversified across hundreds of brands, and geographies. Coca-Cola is irreplaceable, but Unilever is adaptable.

Both have grown earnings and dividends consistently across decades, and with consistently above-average returns on capital invested.

They are hard to argue with.

There were a number of people who mentioned energy companies, of both the good and evil kind (that’s a joke), and enough to merit an article especially about energy within this debate on Friday. So for today, I’ll leave you with this.

Even if you think Shell or Exxon won’t be around in 2070, it’ll only take ten or 15 years of the current dividend to pay you your money back. Anything after that, pure profit (not inflation adjusted). A couple of years of higher oil prices in that time would see you make your money back even quicker.

Moving on, then there were a number of stocks which came up only once or twice.

Prudential, Legal & General, Johnson Matthey, Apple/Amazon, Rolls-Royce, Altria/Imperial Brands, National Grid, JP Morgan, and Tesco. A couple of gold miners made it in, which I liked seeing: Newmont and SolGold.

As well as a couple I’d never heard of: Pennon and Halma.

Halma is a FTSE 100 company which I’m embarrassed not to have heard of, to be honest. And it does look like an excellent choice, as it seeks recurring revenues from multiple sectors, such as health, safety and the environment. It doesn’t nail its flag to any particular mast, but seeks to generate stable and consistent earnings through excellent service and reputational advantages.

This would be a favourite of “quality” investors, I would imagine. It has done extraordinarily well since the global financial crisis though, rising 15x in just 12 years, leaving its current (forward/expected) dividend yield below 1%. I know we’re investing over 50 years, so something like price-to-earnings (PE) and dividend yield don’t matter so much as dividend growth, but a yield below 1% and a PE ratio of 50x will make life harder.

This is actually a recurring problem with many of the suggestions I made, and the ones many people sent in.

Such stocks, which mostly fall into the “quality” category, have been some of the best performers outside of tech since 2008.

With rates and therefore bond yields so low, everyone interested in income (older investors, pension funds, 60/40 funds, and cautious investors) have been forced to high-quality equities for stable yields.

This has made companies with high-quality businesses, consistent earnings growth and high margins, with a long history of dividend increases the go-to investment.

They are known as “bond proxies”. Unilever, Diageo, Halma and other similar stocks have all done brilliantly.

This naturally makes sense.

At its core, investing is about trying to find the best companies, and these clearly are. Decades of solid growth with high margins, clear barriers to entry and defensive moats, alongside market leadership, with a keenness to return money to shareholders.

These are certainly respectable answers, but they face one major threat.

These stocks have benefitted more than most from low interest rates, as that has forced income investors of all sizes to use them as a proxy for bonds. If rates rise and such investors can once again achieve a tasty 4% or 5% yield from government bonds, then the need or desire for such bond proxies will dissipate.

I think it’ll happen sooner than most, but a change in the direction of rates in the next 50 years feels likely.

Altria as a tobacco stock is interesting, people love tobacco and presumably always will.

Apple and Amazon… what can I say. I was pleased that only two people went for any of the FAANGs!

Their current lofty valuations are based on a runway of growth stretching into the next few decades.

It was interesting to me that so few of you went for one of them.

Been reading too many of my biased, propaganda-laden FAANG critiques, I suppose…

Such companies certainly feel insurmountable right now.

But that’s always true when one set of companies is on top of the world. And cracks are starting to show. Much more discussion about their role and responsibilities, their wrongdoings and unfair advantages. Such conversations can hardly end well. At least Apple pays a dividend, though it is again below 1%.

Answers I liked were Nestlé (will our children and theirs avoid chocolate? Only if they’re determined to live less joyously than their forefathers!), Newmont (mmm, shiny!), and Encavis (a major European renewables-based utility, which will come into play on Friday).

My favourite answer though, came from one Paul D.

He said: Manchester United.

Many people aren’t aware that some clubs are publicly listed. Off the top of my head, the other main ones are Juventus in Italy, Ajax in the Netherlands and Celtic in Scotland.

His reasoning was this:

They will never merge and have been around since 1878. They found success in the late 60s and just like gold have had their ups and downs since. Currently in a bit of a low and possibly a new stadium is on the cards. Once that is sorted I think the 2030s could be their decade, they certainly are a global brand.

I would add to that that football is a game favoured in most of the world, and Man Utd is its most popular brand. Even as the club has struggled on the pitch, its global shirt sales have doubled in the last decade.

What’s more, money is pouring into the game at an incredible rate. Competition between broadcasters has favoured Premier League clubs, which have been given blockbuster TV deals.

When Amazon, Netflix and co start trying to muscle in on live sport properly, their budgets could have a similar effect.

Also, in terms of durability…

A club like Man Utd cannot fail for long. It’s an institution in that city, and the size of its stadium and fanbase is matched by the extent of their expectations, as well as their eternal support.

Investors and business folk talk of the “cost of switching” from one product to another.

With a club like Man Utd, switching is almost impossible. Support is passed down through generations.

Man Utd has also aggressively marketed to the developing Asian markets, where it is the most supported club in every major country bar Japan.

Paul, hats off.

A football club was going to be my niche answer so I was hoping no one would steal my thunder but there you go!

For what it’s worth, here are a few that I would consider that didn’t come up. These are by no means supposed to be recommendations, merely examples of different ways you could approach this question.

For quality, history and adaptability combined with value: Peugeot.

For a technology play which isn’t caught up in the hype, Sony.

For great value, a phenomenal yield and a core economic input, Evraz.

For an end to central bank interest rate terrorism, Lloyds.

And for global health, and a long history of looking after it, Pfizer.

All offer a mix of value, high dividend yields, long histories and brighter futures ahead than are currently visible now, in my very hesitant opinion.

But really, your suggestions covered a great range of long-term themes and some were very interesting and enlightening so thanks again.

You’d be hard pressed to say that a portfolio made up of everything we’ve mentioned would do terribly in the long run. Lots of quality, a bit of growth and a bit of value, with a pretty high dividend rate overall. Good work, team.

Next up, which energy companies will exist in 50 years? It’s a tough one.

Best wishes,

Kit Winder
Editor, UK Uncensored

PS Shell and Exxon may pay you dividends today. But if you want energy companies that have (exponential) growth potential, I would recommend you click here, and read this message carefully.

You may like

In the news
Load More