There are, essentially, three elements to becoming rich by investing – time, capital, and returns. Over a period of time your wealth is determined by a combination of these three elements. You can start off with a lot of capital, in which case you’re already rich and simply have to try your best not to lose it all. Or you could start off with a genius way to earn a high return, perhaps by starting a profitable business or trading commodities.
For most people, however, neither of these is a realistic option. There’s a slim chance you’re reading this if you’re already rich or a professional investor with a Charter in Financial Analysis (CFA). But there’s one piece of the puzzle that fits everyone – time. If you think about it, time is the only resource we all start off with in equal measure. Most people live to a certain age, and everyone has the same number of hours and days till then. Time, really, is the key.
To put time to good use, you need ‘forever stocks’. What are forever stocks? Well, they’re stocks that provide a decent return (usually in the form of dividends) for eternity. For most average income-seeking investors they really are the key to immense wealth. Here’s what you need to know about them.
The Power of Compounding
We’ve touched on the power of compounding before. Professional investors and business leaders will tell you it’s the key to success in investing. Even Einstein once said it was the most powerful force in the universe.
We agree with Einstein, of course. Over time, with a stable rate of return, you can make miracles happen. Even if you start off with a tiny sum and a low rate of return, with enough time you can turn it into a huge pile.
That’s what forever stocks are all about. These are high-quality, blue chip stocks with a focus on longevity. Stocks that have proven business models, good prospects for the future, enough of money to sustain them, and a high caliber management at the helm of operations. Of course, for these forever stocks to truly live up to their promise, they have to offer a dividend.
The Stickiness of Dividends
What are forever stocks? They’re perpetual dividend machines. Dividends are inseparable from the concept of forever stocks for a few reasons:
- Dividends are directly linked to profits
- Dividends signify a mature company with enough resources to manage a crisis
- Dividends tend to be sticky. Management prefers keeping the dividend policy stable and rarely cuts the dividend.
- Dividends are easily predictable and tangible.
The stickiness of dividends is the key factor. Once a company has declared a dividend, it finds it very hard to cut, suspend, or modify it. Doing so would send the wrong signal about the company’s prospects.
This stickiness has other advantages. Because the company’s management realizes the power of signaling, they are very reluctant to declare a dividend they cannot afford. Most companies are conservative about their dividend rates and are careful about preserving this stream of cash flow for as long as possible.
The stickiness can also be measured with historical data. What is a forever stock without a long history of stable and growing dividends? A company listed on the Dividend Aristocrats Index has a proven track record of twenty-five years. That sort of track record is hard to beat when you’re looking for a substantially long-term bet.
What are forever stocks and what do they look like? Here are a few examples:
Top 3 Forever Stocks
Johnson & Johnson (NYSE:JNJ)
Baby shampoo, Band-Aids, and Tylenol, are all businesses with a forever market. But Johnson & Johnson is a lot more than simply great consumer products. Last year, 47% of the company’s revenues came from pharmaceuticals and medical devices made up 35%. The remaining came from consumer-facing brands, which the firm has been expanding relentlessly. Not only does J&J meet the criteria for inclusion on the Dividend Aristocrats Index, it surpasses it. The current dividend yield is low at just 2.7%, but considering the fact that the company pays out only 60% of free cash flow every year there’s room for growth.
2. Realty Income Group (NYSE:O)
Realty Income is designed to be a forever stock. It’s the average investor’s ticket to riches in American real estate. A slice of the property wealth of this country. Not only has Realty Income paid out a stable and growing dividend for every year over the past 75 quarters, but it has paid out a predictable and juicy dividend every month for the past 48 years. Over that long history the company has trademarked the term ‘The Monthly Income Company’, grown dividends 79 times over twenty years, been included on the S&P 500 and the S&P High Yield Dividend Aristocrats Index. Over its history, the company has paid its investors more than $4.5 billion in dividends. With interest rates and property prices low, there’s no reason to assume the cash-flow train is stopping anytime soon.
3.CVS Health (NYSE:CVS).
Unlike its rivals, CVS has picked the path of vertical integration. It’s managed to sustain growth at the pharmacy benefit manager (or PBM) part of the business which is quickly turning into a lucrative cash cow for the whole firm. Right now the dividend yield is an abysmal 1.9%, but since the payout ratio is only 25% there’s plenty of room for growth in dividends if the company stops being so conservative with its cash.
If you’re ever wondered what are forever stocks, the short answer is stocks you can safely hold forever. Businesses that are protected by economic cycles, have the ability to generate vast piles of cash, and keep growing annually are worth considering as forever investments.
The longer you hold these stocks, the better your overall performance and eventual return.