Two Income Stocks to Hold Forever

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Includes: SNH, STON
by: StreetAuthority

By Carla Pasternak

I am asked one question more than any other: "What should I buy?"

It can be a tough one to answer. After all, everyone has different goals for their portfolio. Some want the safest dividends possible. Others want the highest yields they can find. Still others are looking for a combination of growth and yield.

So when I answer, I make it simple on myself. I tell people to buy income stocks they'll want to own forever.

In my mind, these "hold forever" gems are the safe, reliable securities that increase dividends year after year. The securities you hold forever should come courtesy of businesses so fundamental that demand never falters. For income stocks, this kind of unwavering demand drives reliable dividend growth. Year in and year out, regardless of circumstance, these stocks can power -- and even raise -- dividends.

This sort of steady demand isn't a fairy tale. For example, StoneMor Partners LP (Nasdaq: STON) is the nation's second-largest owner/operator of cemeteries. It operates more than 250 cemeteries and 60-plus funeral homes across the United States. The company takes one of life's certainties and channels it into consistent dividend growth.

Since going public six years ago, StoneMor has increased dividends eight times. The latest increase came just last month. StoneMor now pays $2.26 per share annually and generously yields about 8.0% based on recent prices.

But along with steady growth, a "hold forever" gem must also have safe dividends. That means dividends are comfortably covered by cash flow. Last year StoneMor produced $35 million in distributable cash flow, but paid only $27 million in dividends. That leaves plenty of room for future dividend hikes.

Truth be told, the graying of our population is a great place to look for long-term holdings. It's one trend that shows no sign of reversing for decades.

That's why I am also a fan of Senior Housing Properties Trust (NYSE: SNH). Senior Housing Properties owns independent and assisted-living facilities that cater to seniors. It owns roughly 300 housing sites across the country.

Senior Housing began paying dividends in 2000 and has raised payments steadily since then, a few pennies at a time. There has never been a dividend cut, even during the recent recession. The dividend hiked twice in 2007, again in 2009, and again last month to a $1.48 per unit annualized rate. At this new rate, Senior Housing yields a steady 6.0%.

Distributions are safe since Senior Housing easily covers payments from its funds from operations (FFO). The company produces roughly $53.5 million in FFO each quarter, which covers $45.9 million paid out as distributions. Moreover, reliable cash flow is ensured by long-term leases on properties, and growth comes from built-in rent increases.

Either StoneMor or Senior Housing would qualify as "hold forever" income stocks. And even though they're just examples to show what I'm talking about, you may want to consider them for your own portfolio. Of course, there is no such thing as a perfect investment. Even with long-term holdings, you have to be willing to overlook a few blemishes. For instance, Senior Housing Properties relies on one tenant -- Five Star Quality Care -- for nearly 60% of its income.

At this point, however, I think the benefits of steady demand and reliable dividends outweigh the risks, and it should be that way for a long time.

Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.