Advantages + Buybacks + Dividend
A Shareholder-Friendly Company
Editor's Note: In today's Cabot Wealth Advisory, you'll hear from Paul Tracy, a co-founder of StreetAuthority and chief investment strategist of StreetAuthority's Top 10 Stocks. Paul discusses "forever" stocks--these are stocks that investors can hold onto forever. To qualify as one of Paul's "forever" stocks, the company must have big advantages over its competition and buy back large amounts of its own stock, and the stock must pay a dividend.
Recently, I've written a lot about buying "forever" stocks. These are the stocks I think that you can buy, hold and basically forget about--all without losing much sleep at night.
When you buy this exclusive class of stocks and let them grow year over year, you increase your chance of earning big returns, and you decrease the odds of losing money.
It's such a simple concept ... and it works.
I've written before about the Oppenheimer study that looked back as far as 1950 and found the S&P 500 has NEVER suffered a loss in a 20-year period.
But we all know that holding through thick and thin can be a challenge. After all, no one likes to see holdings lose money, even if it's temporary.
But when you look at the right kind of "forever" ideas, holding for the long term is not nearly as difficult--because they show a remarkable ability to hold up, even in bad markets.
Take the performance of the stocks I recently selected as my "10 Best Stocks to Hold Forever." Since the beginning of the downturn that began on July 22 through Wednesday's close, the S&P 500 has dropped -11.2%.
But these 10 "forever" stocks are down just -5.0% during that same time period--half as much.
In fact, one of these ten investments, MasterCard (MA), soared 13% on August 3, following a great earnings announcement. That certainly helped investors cushion the blow the next day, when the Dow lost more than 500 points.
And if you look over a longer period of time, the difference is even more prominent. During the past year, the average return on these "forever" stocks is 29.0%, while the S&P is only up 9.3%
Now I'm not trying to brag about how these stocks missed the downturn while investors saw trillions in market cap evaporate. My job is to help investors make money, so I want to show you why these stocks did better.
If you know what to look for, then you'll be able to spot additional "forever" stocks on your own.
Unfortunately, you can't just buy any stock, hold it forever, and expect to come out ahead. The market is littered with Enrons, Worldcoms, even General Motors. Holding forever didn't matter a lick with them.
So when I look at our "forever" investments, there are three major things that stand out to me. I look for companies that...
- Enjoy huge (and lasting) advantages over the competition
- Pay their investors each and every year by dishing out fat dividends
- Buy back massive amounts of their own stock
My research has shown that more often than not, these are the companies that can make you money in the long run. And once you find them, the strategy is simple--just buy shares and hold them for the long term.
It makes sense--strong companies that take care of their shareholders tend to do better over the long run.
Take one of my "forever" stocks, Philip Morris (PM), for example. Philip Morris is one of the most dominant companies I've ever researched. This company sells its products in 180 countries and owns seven of the world's top 15 global brands in its market.
But it's also the most shareholder-friendly company I've ever seen. In the past three years, it has raised its dividend 39.1%... and by the end of last year, the company had repurchased more than 330 million shares (about 16% of all shares outstanding). That's one reason why earnings per share jumped 20% in 2010.
Buy it now and you'll lock in a solid yield of nearly 4%, and I expect another dividend increase in the next quarter or two. Meanwhile, the company plans billions more in share repurchases this year, which should support the share price in just about any market.
But not only is there long-term upside potential. Philip Morris sells cigarettes, a product whose demand rarely fluctuates. That sort of business stability has meant stability in the share price as well, which lets investors sleep well at night.
Of course, with investing there is never a surefire thing, and in fact, some of my "10 Best Stocks to Hold Forever" are down since we first went public with the list in mid-July--but not nearly as much as the market.
That said, I think investing in companies with the traits I described above could be the key to profiting in the stock market. By choosing strong, shareholder-friendly companies, you're investing in healthy businesses that won't crumble at the first sign of financial panic.
And with the stock market whipsawing as it has been, knowing that your investments have a great track record of holding up nicely in a downturn is a valuable asset in and of itself.
[Note: You can learn more about the rest of my "10 Best Stocks to Hold Forever" --including several names and ticker symbols--by viewing the latest Street Authority research here].
All the best,
StreetAuthority Co-founder, Chief Investment Strategist, Top 10 Stocks