How to Find the Perfect Stock to Own for the Long Term

It's a strange time to be a long-term-minded investor...

For one, the outlook for the next decade doesn't look great. With how expensive stocks are today, based on history, we should expect to see low to even negative annualized real total returns over the next 10 years.

We're also in the final phase of a Melt Up, and that means investors with a holding period of a decade or more will be holding through the boom that will come in the next few months... but also the inevitable crash.

It raises the question, "Why wouldn't I just wait to buy stocks after the crash?"

It's simple enough logic. But my response to that would be, "good luck"...

Timing a market bottom is nearly impossible. Buy back in too soon after a crash, and your portfolio will fall another 20%. Buy back in too late, and you've missed all of the best gains already.

Besides, we'll likely see incredible gains over the next few months, and you don't want to miss out on that.

We're in a tricky time for sure. But I'm here to tell you that you can still be a buy-and-hold investor. You just need to own the right stocks.

Today, I'm going to show you some of the qualities I look for in long-term investments...

  1. Stick with what you know.

This one is the most obvious, but it's also one of the most important.

Almost every time I see family members or friends, someone pitches me on a new stock idea. Most of the time, it's some tiny tech company set to revolutionize the world. And every time, the story sounds great.

It might be great, too. The only problem is that I'm no expert in nanotech or nuclear fusion. (Neither is the person pitching the idea.) If I can't explain how the company makes money to a 10-year-old, I'm taking a risk. The vast majority of investors would be better off hitting the casino.

The more you understand the company's products, its competitors, and even its weaknesses... the better you'll be able to predict future cash flows.

Take Chipotle (CMG), for example. Chipotle's business model isn't a secret. The more burritos it sells, the more its stock price should go up. So every time you drive by a Chipotle, just take a look how long the line is.

Investing doesn't have to be complicated.

Stick with companies you know and understand. By just doing this, you'll become a better investor overnight.

  1. Find a company with a moat.

Since we're looking for stocks to hold for a decade or more, you don't need to worry as much about timing and valuation. Instead, focus on the strength of the underlying business. You want to be sure the company is going to be thriving 10, 15, and even 20 years from now... with products that folks will continue to love over time.

Looking at this on a more technical level, you need to find companies that have strong advantages over their competition. They need to have what Warren Buffett would call a "moat."

This can come in the form of a powerful brand, a lock on distribution, a large customer base, or ways to retain its customers.

Consider megabank JPMorgan Chase (JPM). It has a moat because of how massive it is. Other banks can't compete when JPMorgan is able to spend $12 billion a year on technology alone.

This is a company that will stand the test of time. It's a stock you can sleep well at night owning.

  1. Look for Dividend Aristocrats.

The majority of any long-term-minded portfolio should be made up of dividend-paying stocks. Specifically, ones that increase their dividend payments every year.

I love this statistic... Over the past 90-plus years, dividends were responsible for roughly 40% of the total market return. If you want long-term success in the market, own high-quality dividend payers.

To find the most consistent dividend payers, check out this list of Dividend Aristocrats. These are S&P 500 companies that have increased their dividends for 25 consecutive years or more.

Without knowing anything else about the company, you know a Dividend Aristocrat is a high-quality business. There's no way a company could increase its dividend for 25 consecutive years without generating a lot of free cash.

Over time, high yielders will reward you. It's all about the power of compounding returns.

  1. Own companies that are highly efficient.

You want to buy companies that don't have to spend a lot of money to make a lot of money.

These are companies that are highly profitable and can return money back to shareholders. One way to find these efficient companies is by looking at something called return on assets ("ROA").

The formula for ROA is net income divided by total assets. The higher that number, the better a company's management team is at using its assets to generate income. These companies are better able to hold up during recessions.

The average company in the S&P 500 has a ROA around 2.7%. I like seeing a company that has a ROA of at least 10%.

  1. Don't focus on valuation... but be aware of it.

While everyone would like to pay a reasonable valuation, when you're choosing a stock you want to own for many years and decades, you don't have to be as concerned as you normally would.

That's because you're going to buy these stocks for years and – for the dividend payers – keep putting cash into them. That means you won't be paying today's valuation... You'll be paying multiple valuations over the years – some high, some low, as your dividends keep rolling in and automatically buying new shares.

Still, you can't go nuts and buy some of the highest flyers in the market.

Take, for instance, the famous example of Microsoft (MSFT). If you bought it at the height of the dot-com boom, it would have taken over a decade for the stock to just break even.

Stick with stocks that are reasonably priced. You don't want to be in a position where you're paying 60 times earnings or 20 times sales for a stock – even a great one.

Putting everything together, take a look at a stock like Colgate-Palmolive (CL). It has all the qualities I look for...

Colgate-Palmolive is a company you can easily understand. It sells household products, from toothpaste to laundry detergent to deodorant. You likely have many of its products in your house already. And it's easy to find out how popular the products are by asking if family and friends use them as well.

Colgate-Palmolive's moat is its time-tested brands and global reach. It generates billions in free cash flow every year, and that's allowed it to increase its dividend for 57 consecutive years. Shares are currently yielding 2.2%.

The stock has a ROA of 17.2%, meaning it's very efficient. Finally, shares trade for 27 times earnings, which is slightly cheaper than the broader market.

Colgate-Palmolive is a stock that you could buy today and never have to worry about selling. And if you pay attention to these five traits, you'll be able to find more just like it.

Here's to our health, wealth, and a great retirement,

Jeff Havenstein and Dr. David Eifrig

Editor's note: Right now, Doc is going public with a free stock recommendation... which is something he almost never does. Wall Street wants you to believe this sector is "over your bead." But this stock is the perfect business to own during – and after – COVID-19... with the potential for triple-digit gains over the next year. So don't miss Doc's No. 1 recommendation today... Watch his video right here.

Further Reading

"Learning a few rules of thumb can help you continue to build your wealth," Doc explains. If you're looking for income opportunities to grow your finances safely over time, make sure you follow these four simple guidelines... Read more here.

Stock valuations are high today. That means it's time to think about your risk-to-reward setup. As the bull market continues, follow these steps to give yourself a greater "margin of safety" right here.  

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Owning dividend-paying stocks is a great way to grow long-term wealth. And there are a few tips you can use to finding the best dividend stocks in the market...

Market Notes


Today's chart shows a stock that's benefiting as folks buy more stuff...

Regular readers know that investing in big, secular trends tends to be a winning strategy. And Americans love to buy and own stuff... which means they need somewhere to put it. A 2020 Self Storage Association study showed that more than 10% of U.S. households use storage units. That's great news for today's business...

Life Storage (LSI) is one of the leading U.S. self-storage companies. It employs more than 2,000 people, with around 925 facilities in 34 states. Folks turn to this company's storage units when they run out of room at home. And its business is growing today... In the first quarter, Life Storage reported increased same-store revenue, up 7.3% year over year. And it bought 16 more stores.

As you can see, LSI shares are up roughly 65% over the past year. And they recently hit a new all-time high. As the trend of hanging on to stuff continues, shares should keep rising...