Buy and Hold stocks can be a stress-free part of your portfolio making these forever stocks the best part of investing
We talk a lot about forever stocks, the stocks you can buy and hold forever, here on the channel. It’s one of the favorite parts of my own portfolio because it’s such an easy and stress-free way to invest. I even shared my own seven forever stocks in a free report here.
But how do you find the best stocks to buy and hold forever? What are the criteria to look for in picking stocks that are guaranteed to go up over time? What are the stocks that, if you forgot the password to your investing account, you wouldn’t worry about checking on them for the next ten years?
I’ll share what I look for in finding buy and hold stocks, how to decide if they’re right for your portfolio and how to invest!
What are Buy and Hold Stocks?
We usually talk about buy-and-hold as an investing strategy. The idea is you buy a small group of stocks and then hold them no matter what. This takes the guess-work and market timing out of investing and usually leads to better returns. It’s also a lot easier because you don’t feel the need to constantly be looking for new stocks to buy.
But buy and hold can describe the specific stocks you buy as well, the ones you’re confident to buy and not look at for a decade. These are usually very large companies with the financial size to survive even the worst stock market crashes but also with the competitive advantages for growth over the next ten years.
It’s that combination of survivability and growth that make these some of the best investments you can make.
A Checklist for Buy and Hold Stocks should Include:
- Large Cap Stocks with the financial flexibility to survive any economy
- Sales growth faster than competitors over previous three years
- Operating profitability better than competitors or improving
- Leadership in a growth industry for survivability and returns
- Strong balance sheet with limited debt
- Sustainable dividend yield
Of course, your buy and hold stocks don’t need to check every box but the perfect long-term investment is going to meet as many of these criteria as possible. Most growth stocks won’t pay much of a dividend, if at all, but it’s always nice to get that cash flow while you invest. Faster sales growth and higher profitability versus competitors are critical though as it shows a real competitive advantage for the company that will help it not only survive but grow long-term.
How to Find Buy and Hold Stocks
Whenever I look for stocks, I like to start with a simple stock screener that includes as many of the criteria as possible. This makes it easier to narrow down my list of stocks to buy and hold rather than start with the 5,000-plus traded on the exchanges.
From the shorter list of best stocks to buy, I can then narrow it down to a few according to the criteria I couldn’t use in the screener. Let’s look at each factor in the buy and hold checklist to see how it applies.
Large Cap Stocks are those with a market capitalization, the value of all shares issued, of at least $10 billion or more. These don’t have to be the very largest companies but they do have the financial size and flexibility to survive. Even in a very bad recession, these companies will have access to debt funding and will be able to retrench to protect cash flows. That might not be possible at a smaller company and bankruptcies at small cap companies are much higher than large-cap peers during a recession.
Sales growth is the change in revenue reported each year and I would generally go with a three-year average when finding buy and hold stocks. Not only does faster sales growth usually mean higher profits and higher returns but it’s also a good indication of a competitive advantage over peers. If one company in an industry is producing much faster sales than its competitors, it could be taking market share because of a stronger brand or better marketing.
Operating profitability is measured through the operating margin, easily my favorite metric to analyze stocks. This is the operating income dividend by revenue and shows how efficient management is at turning sales into profits. Just like sales growth, not only does a higher operating margin show better profitability and probably returns, but it might also point to companies with better management…another great factor in determining long-term, buy and hold stocks.
Leadership in a growth industry is important because a lot can happen in ten years. The top company in the maker of horse-drawn carriages was still in trouble when cars became affordable. For the best forever stocks to buy and hold, you need companies in growth industries in no danger of becoming obsolete.
Strong balance sheet is a little more subjective and involves more analysis but is also something you should be looking for in a perfect buy and hold stock. A strong balance sheet will be one with a high amount of cash, for financial survivability, and low long-term debt. This not only gives the company better survivability but can also mean safer cash flows that can be used to pay dividends.
Sustainable dividend yield is probably the least important for buy and hold stocks but is still one I like to look for in my portfolio. Since you’re holding these stocks for a decade, most of your return will be from the stock price increasing but it’s still nice to get that regular cash flow from a dividend as well.
We’ll talk more about how to invest in buy and hold stocks but it’s important to understand, you don’t have to invest in lots of stocks with this strategy. The best long-term stock portfolio is a core-satellite approach with three- to five-ETFs and 10-to-20 stocks. Once you find that handful of companies you really like, then just keep reinvesting in those to grow your portfolio.
Are Buy and Hold Stocks Right for Your Portfolio?
Buy and hold stocks should be a part of every investor’s portfolio. Even day traders need a part of their wealth dedicated to long-term growth and wealth-building.
Buy and hold stocks represent a lower-stress part of your portfolio because you don’t have to worry about what they do from year-to-year. Bad things happen to good companies and even a buy and hold stock can slump for a year or two. That shouldn’t matter though because, if you’ve picked the best buy and hold stocks, then they should go up log-term and produce returns.
It's fine if you want to use other investing strategies like penny stocks or a focus on moonshot investments but take twenty- to thirty-percent of your portfolio to invest in your forever stocks. That way, whatever happens with the rest of your portfolio, you know you’ll always have that group of buy and hold stocks producing long-term profits.
How to Invest in Buy and Hold Stocks
Investing in buy and hold stocks is one of the easiest strategies you can use. If you’re holding these for at least five- to ten-years and only need the best 10 to 20 stocks, then obviously you don’t need to jump at every hot stock tip you hear. That’s part of the beauty of this strategy. Once you’ve found your list of buy and hold stocks, you don’t even need to worry about your investments.
Be strict in your criteria and which stocks you buy. If you’re just starting out and can only find three stocks you really believe in, then don’t feel pressured to buy others to fill out your portfolio. Put the rest of your money in other assets or broad ETFs until you find more stocks to buy.
Every three- to six-months, revisit your criteria to see if there are other stocks that meet your filters. Once you have a portfolio of buy and hold stocks, you can check in on each stock every year…so maybe check one stock a month. Since the idea is to hold it long-term, you’re only checking to make sure the company hasn’t changed or management hasn’t ruined the investment case. If it’s still basically the same company, even if it’s stumbled a little, then keep it and give it time to regain its momentum.
Buy and hold stocks can be a stress-free, high-return part of your portfolio but you need to know how to find them. These aren’t just any stock you hear about on TV but the leaders in their industry with the financial strength to not only survive but also grow. Using the buy and hold checklist above, you’ll be able to find the stocks that can produce high returns for years to come.
Don’t Miss the Entire Stocks to Buy Series