What makes a hold-forever-stock, one to hold for 10 years or more, forget about, and sleep soundly? Let’s go over the qualities of a hold-forever-stock and then reveal some of my picks.
First, let’s be clear. This isn’t about timing. I’m not saying that my selections are great buys right now. I’m saying that I would buy any of them and not look at my account for 10 years!
OK, that last bit was for dramatic effect. As a disciplined dividend growth investor, I review my holdings quarterly, even “forever stocks”, as should you! 🙂 However, I’d be comfortable trusting them even if I couldn’t monitor them. So no, not crypto currencies.
All my forever stocks share several qualities. They are diversified, leaders in their market, enjoy economies of scale and predictable cash flow, operate a stable and/or sticky business model, sell essential products /services, and show multiple growth vectors and a long dividend growth history.
Diversification
Forever stocks are companies that diversify to reduce risk by not relying solely on one market or product for revenue.
They do so by expanding into markets or product lines that are related to their existing business, or into entirely different industries or markets, e.g., a grocery company entering financial services.
Beyond reducing risk, diversification offers a more consistent revenue stream, opportunities for innovation sparked by entering new markets, and enhanced competitive advantages due to expanding reach and customer base.
Market leader
Forever stock companies are often dominant in their industry or market segment, enjoying a significant market share and strong competitive advantages, often setting the pace for trends and innovation.
What makes a market leader? Brand recognition and customer loyalty; marketing strategies that resonate; efficient operations and supply chain management; finances that allow for investment in R&D, marketing, and expansion; broad geographic reach; diverse offering portfolio; strong distribution network; skilled leadership and workforce.
Often, companies are market leaders because they were early entrants into a market, establishing themselves before their competitors, or are in industries with sizeable barriers to entry that hinder new competitors.
As it is in sports, remaining at the top is hard work. Leaders must continue innovating, invest in their brand, and stay attuned and adapt to market dynamics.
Economies of scale
As a company produces more of its product or service, average cost per unit decreases because:
- Costs that are relatively stable regardless of quantities produced, such as marketing or facilities, are spread over a larger number of units.
- Tasks become specialized, employees more efficient; the time needed per unit decreases.
- Companies negotiate better prices or discounts as they buy more raw materials and components.
- Full utilization and optimized efficiency of production equipment reduces downtime, and maintenance costs.
More prevalent in industries with high fixed costs and CAPEX, like manufacturing, energy, and transportation, economies of scale enable offering competitive prices and investing more in growth and innovation.
Predictable cash flow
Being able to reasonably anticipate consistent and steady incoming cash over time is crucial for a company’s financial health and sustainability. It enables better planning all around, including debt payments and growth initiatives.
Companies adopt strategies and practices they hope will improve predictability. Factors that help predictable cash flow include:
- recurring revenue: subscriptions or maintenance contracts
- stable customer base and consistent sales
- long-term contracts and predictable sales patterns
- steady operations without significant volatility or changes
- multiple revenue streams
Stable / sticky business model
A stable business operates consistently and predictably; it found a formula for generating revenue and maintaining profitability. No wild fluctuations in its operations or financial performance; it enjoys steady and reliable demand, a consistent customer base, and generates stable revenue.
A sticky business, on the other hand, aims for customer loyalty and retention, and repeat business. Customers “stick around” because the products or services are so valuable, reliable, essential, integrated, or difficult to switch from.
Both models contribute to success and long-term viability. A company can have a model that is both stable and sticky, e.g., a subscription-based software company whose product has consistent demand (stable) and capabilities that make it difficult to switch to a competitor (sticky).
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Essential products / services
Selling essentials—food, medical supplies, energy, communication services, transportation, etc.— produces relatively stable demand and revenue stream, repeat business due to customer loyalty, and resilience. We rely on essential products and services so much that we prioritize buying them even during economic downturns.
Because essentials remain necessary over time and respond to universal demand, companies selling them are more likely to have a long lifespan and expand into new markets or regions. They might also get government support in recognition of their critical role in society.
Multiple growth vectors
Growth vectors are paths to expand business, increase revenue, and enhance market presence. Companies often pursue several growth vectors for balanced and sustainable growth. Examples include:
- increasing share in existing markets or entering new geographic regions with existing products or services.
- creating new products / improving existing ones to meet evolving needs.
- reduce dependency on a single product line by entering product categories unrelated to current offerings.
- expanding upstream or downstream in the supply chain, e.g., a car manufacturer acquiring a tire manufacturer to secure a steady supply.
- mergers and acquisitions.
- selling or adapting to new customer segments or market niches, e.g., marketing an athletic apparel brand to seniors to promote health and fitness.
Long dividend growth history
A long dividend growth history brings a smile to my face. Think about Genuine Parts (GPD) with 66 consecutive years of dividend increases, or Fortis (FTS.TO) with 49! Yearly increases over decades mean the company ticks the boxes for a lot of the qualities described earlier.
However, many companies show impressive growth and robust dividend growth, without several decades of dividend growth behind them. They can still be forever stocks based on their capital appreciation, promising long-term dividend growth, and other qualities from this list that they possess.
Hold-forever-stocks selection
Several of these stocks are in my portfolio already; others are in DSR portfolio models, or my buy list. All are great companies I consider forever stocks. Clearly, this isn’t a complete list; I could choose more than one per sector.
DSR members, you can see the full analysis of these on the DSR website.
| U.S. Picks | Canada Picks |
| Disney (DIS) | Telus (T.TO / TU) |
| Genuine Parts (GPC) | Magna International (MG.TO / MGA) |
| Procter & Gamble (PG) | Alimentation Couche-Tard (ATD.TO) |
| BlackRock (BLK) | National Bank (NA.TO) |
| Johnson & Johnson (JNJ) | Canadian Natural Resources (CNQ.TO / CNQ) |
| A O Smith (AOS) | Canadian National Railway (CNR) |
| Apple (AAPL) | Constellation Software (CSU.TO) |
| Air Products & Chemicals (APD) | CCL Industries (CCL.B.TO) |
| Equinix (EQIX) | Granite REIT (GRT.UN.TO) |
| American Water Works (AWK) | Fortis (FTS.TO / FTS) |
On one of your podcasts, Vero said she had to sell a stock (at a loss) but did not mention the reason. Can you make a podcast show on when to sell a stock. We always have read about when to buy and how to buy but we seldom hear when to sell a stock even if it’s at a loss. (cut your losses)
hello Claudio,
Thx for the inspiration! I’ll do even better: how about a webinar on the topic? the invitation will be sent to all newsletter subscribers 🙂