As price multiples exceed long-term averages and the market stumbles on every marginal excuse, investors remember recent market crashes and wonder if buy-and-hold is dead. While any stock may see losses with another market crash, there are names that combine cash and price return to perform well over the very long term. Investors looking for stocks they can hold forever should look to consistently increased dividends in sectors with strong cyclical trends.
Not hitting the reset every 10 years
Despite the five-year bull market, the millennium has been tough for investors. It seems every time investors start to see solid gains, a market crash wipes out the cycle's returns. Ex-dividends, the S&P500 has only returned 1.5% annually since January 2000.
One thing that cannot be wiped out in the next market collapse is the regular cash return from dividend-paying stocks. Since 1946, dividends have accounted for 55% of the real return to stocks, though yields have dropped lately to just 2% for those in the S&P500.
While finding a stable cash return is important, possibly more important is a company that consistently increases the cash payout. Regular increases to the dividend can significantly boost your returns over the long term. Investors can see their yield on the initial stock price double every six years with a company that increases its dividend by an average of 12% per year.
Besides a strong history of dividend growth, look for companies in sectors with cyclical trends that should last for at least a decade or two. Fortune-telling is not my strong suit and I doubt that anyone could forecast sector returns over the next 20 or 30 years, but there are some strong tailwinds for a select group of industries and sectors. These sectors include energy, healthcare, agriculture and rail transportation.
Deere & Company (DE) pays a 2.5% dividend yield and has grown sales by a compound annual rate of 9% over the last 10 years. Over the last decade, the company has increased the quarterly dividend by 16% a year. Growth in the emerging market middle-class and global population growth in general will be a strong driver to the agricultural sector over the foreseeable future. In contrast to peers, Deere has a more focused portfolio with its agricultural equipment division accounting for 75% of total sales.
The company recently disclosed that it is considering a sale of its water-irrigation business, which accounts for less than one percent of total revenue but has been mired by asset impairments and expenses. The move may help Deere to focus on more profitable lines and markets as with its announcement that it will invest $40 million to manufacture its popular 8R tractor series in Brazil.
Archer Daniels Midland (ADM) pays a 2.1% dividend yield and has grown sales by a compound annual rate of 10% over the last 10 years. Over the last decade, the company has increased the quarterly dividend by 12% a year. The company has an extremely large and diversified line of products and geographic segments. This diversification may smooth growth across the portfolio but it still has a great opportunity to take advantage of the growing global need for processed food ingredients.
Approval is still pending for the company's acquisition of GrainCorp, the Australian port operator. If the deal passes, it could give ADM significant pricing and volume power for exports to China. GrainCorp controls seven of the eight ports that ship grain in bulk from Australia's east coast, much of which is destined for Chinese delivery.
Union Pacific (UNP) pays a 2.0% dividend yield and has grown sales by a compound annual rate of 6% over the last 10 years. Over the last decade, the company has increased the quarterly dividend by 21% a year. The rail industry is experiencing something of a renaissance with surging oil production, auto sales and rebounding construction all driving demand. While the latter two drivers may moderate over the near term, growth in U.S. energy production is a stronger cyclical trend. The company recently unveiled its Arrowedge technology for double-stack intermodal transportation. The new system may help the company surprise on the upside with better car utilization.
Johnson & Johnson (JNJ) pays a 3.0% dividend yield and has grown sales by a compound annual rate of 5% over the last 10 years. Over the last decade, the company has increased the quarterly dividend by 11% a year. Healthcare has some of the strongest upside support from demographic factors over the next several decades and the company has a strong product mix across different industries including drugs, devices and diagnostics.
I have been bearish on Johnson & Johnson in the past, writing that the upside was not worth the risks from poor quality control. The company seems to have managed these risks with fewer recalls lately, though it has had to recall approximately 5,000 dose packs of its schizophrenia drug Risperdal Consta after mold was discovered in some packs. The recall is fairly small and should not be an issue for the company.
Chevron Corporation (CVX) pays a 3.2% dividend yield and has grown sales by a compound annual rate of 7% over the last 10 years. Over the last decade, the company has increased the quarterly dividend by 11% a year. In a high risk-high reward move, the company entered into a $1.24 billion shale partnership with Argentine company YPF S.A. to develop fields in the South American country. The government is notorious for expropriating assets and increasing royalties so we will have to wait to see if the partnership is ultimately profitable. If it is, then Chevron will be one of the first to profit.
The company has yet to bid on any of the contracts that will end the Mexican government's 75-year energy monopoly, but I doubt it will let such an opportunity pass. Mexico has seen production fall for the better part of a decade and desperately needs foreign help to develop its fields. A contract on the government's proposed terms could significantly boost reserves booked on Chevron's balance sheet.
What is 'forever' really?
None of us has to worry about what forever means in investing. Whether you like it or not, your investment time horizon is probably only 20 to 40 years. This makes it easier to look out to the sectors that could do well over the next several decades to construct a solid, long-term portfolio of income-producing stocks.
Over the next 20 years, at least, this means having a mix of healthcare, energy, rail transportation and agriculture. These sectors could present the proverbial rising tide that will lift stocks in their group, regardless of a sluggish economy. Combine this with an increasing cash payout and you have an investment that can carry you through market crashes straight through retirement.