BROUGHT TO YOU BY MARKETBEAT

[Pages:10]BROUGHT TO YOU BY WRITTEN BY THOMAS HUGHES

Buy And Hold, It's The Warren Buffett Way

Buy and hold is the easiest strategy of investment there is. The idea is simple, buy a stock and hold it forever while it helps make you rich. In theory, it's a great concept but in practice buy and hold is a little bit harder to do. Great investors like Warren Buffet have succeeded where others haven't simply because they take the time to ferret out the best-run companies in the best markets. The difference between Warren Buffet and the average investor is that it's Warren's job to ferret out those companies. Most average investors are busy with work and family and don't have the time and that's where we come in. In this eBook, we give in-depth detail on the what, who, and why to buy seven (7) of the best buy-and-hold-forever stocks on the market today.

Dividends Are What Make A Stock An Asset

Dividends are at the heart of what makes a great buy-and-hold-forever stock. Dividends are payments from the business, usually paid from earnings, to its shareholders, and the difference between investing and speculation. As a long-term investor, you want to own assets that pay you to own them, not speculate on some future growth target that may or not be reached. When it comes to dividends, stability is the #1 concern, distribution growth the 2nd. You always want to be sure your payouts are safe for two reasons. The first is that you don't want your yieldon-investment, the original yield on the stocks you've purchased, to ever fall. The second is that you want to protect your capital and dividend decreases, pauses, and suspensions are not the way to do that. Stocks that cut or suspend their dividends tend to see their share prices fall because of it. Regarding dividend growth, dividend growth is a sure path to ever-increasing returns regarding yield and capital gains. A stock that is in a cycle of dividend-growth usually sees its share prices move higher to match. The idea is if the stock is worth X while paying Y, X should increase relative to Y over time.

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What Makes A Stock Worthy Of Holding Forever?

When you think about it, just about any company could be a buy-and-hold-forever kind of stock but they aren't. That's what makes growth investing so difficult, some growth stocks are hot to start and even look like the business has legs but soon fizzle out. Just look at GoPro, it was once the hottest growth stock on the market and now its just another flash in the pan. For us, the best place to begin a search for a company that will last forever is with a group of companies that have been around for, well, just about forever.

The best group to start with is neither industry nor a sector but a quality of company known as Dividend King. Dividend Kings are S&P 500 stocks that have been paying and increasing their dividend payouts for at least 50 years. 50 years is a long time and helps establish a few basic facts about the stock before you even consider the value of the individual companies.

The first is that the business of a Dividend King is blue-chip quality and able to withstand economic and market downturns. Think about it, over the last 50 years Dividend Kings have seen countless wars, numerous disruptions, dozens of market sell-offs, a handful of recessions, and not only paid but increased the dividend every year. Pretty impressive.

The second is that, in order to be a Dividend King, the company and management are committed to dividend payments and ever-increasing distribution amounts. That's important because some companies will raise a dividend in times of good only to lower it in times of bad and that's not what you want in a buy-and-hold-forever stock. As of February 2022, there are 32 Dividend Kings across a diverse range of sectors so there are plenty to choose from.

The one drawback to the Dividend Kings is that many yield lower than the average S&P 500 company. In that vein, you might think it better to invest in an S&P 500 index fund but it's not. It's better to target the higher-yielding Dividend Kings like Altria, Federal Realty, 3M, and Coca Cola than settle for the low yield of the average S&P 500 company. Of these, Coca Cola stands out as a favorite because of its positioning within the consumer market, and consumer and economic trends in the post-pandemic world.

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The Coca-Cola Company (KO)

59 YEARS OF SUSTAINED, CONSECUTIVE DIVIDEND INCREASES

The Coca-Cola Company (NYSE: KO) is the parent to all-things Coke related. Everything from the soda in your glass to the signs on the street generates revenue for this company in some way. Unlike competitors Pepsico and Keurig-Dr. Pepper, which have had to turn to mergers and productdiversification to fuel growth, the Coca-Cola Company is still a pure-play on beverages and it's been increasing its dividend on a regular, consistent, annual basis for 59 years.

In addition to Coca-Cola, the beverage company manufactures, markets, and sells various nonalcoholic beverages worldwide. The Coca- Cola Company provides sparkling soft drinks; water, enhanced water, and sports drinks; juice, dairy, and plant-based beverages; tea and coffee; and energy drinks to consumers worldwide.

The Coca-Cola Company also offers beverage concentrates and syrups, as well as fountain syrups to fountain retailers, such as restaurants and convenience stores. The company sells its products under the Coca-Cola, Diet Coke/Coca-Cola Light, Coca-Cola Zero Sugar, Fanta, Fresca, Schweppes, Sprite, Thums Up, Aquarius, Ciel, Dasani, glaceau smartwater, glaceau vitaminwater, Ice Dew, I LOHAS, Powerade, Topo Chico, AdeS, Del Valle, fairlife, innocent, Minute Maid, Minute Maid Pulpy, Simply, ZICO, Ayataka, Costa, dogadan, FUZE TEA, Georgia, Gold Peak, HONEST TEA, and Kochakaden brands.

THE EARNINGS OUTLOOK: : Other than the small hiccup in calendar 2020 related to the COVID-19 pandemic The Coca-Cola Company is on track to deliver sustained, incremental, YOY growth in both revenue and EPS for the foreseeable future. Revenue growth should trend in the 7% to 10% range with EPS running at a much higher 10% to 20% through 2025 and possibly higher if supply chain costs abate in the second half of 2022.

THE DIVIDEND: Coca-Cola Company is a Dividend King with 59 years of consecutive distribution increases to its credit. The stock is yielding about 2.75 % while trading near $60 and we have every expectation increases will continue on an annual basis.

The payout ratio, a basic measure of the dividend's sustainability, has come down from its post-pandemic peak and is running near 70% with earnings growth in the forecast. The company's cash position is more than sufficient to cover any hiccups in business and the outlook for next year is upbeat. Based on consensus for earnings, the payout ratio should hold steady with earnings growth to offset distribution growth. Any worry about the dividend left at this point should be laid to rest by the balance sheet. The company's cash position, debt-management, and coverage ratios ensure this dividend is dependable. We don't expect to see large increases but we do expect to see incremental annual increases to continue.

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Pepsico Inc (PEP)

50 YEARS OF SUSTAINED, CONSECUTIVE DIVIDEND INCREASES

There is a reason why Pepsico (NASDAQ: PEP) is on this list and not just because of its 2.6% dividend yield. The company has been working hard over the past several years to diversify its portfolio away from the beverage pure-play and those efforts are delivering value for shareholders. The company is growing at a slightly slower rate than Coca-Cola but the outlook for growth has a longer time horizon and that is something we like. PepsiCo, Inc. operates as a diversified food and beverage company worldwide. The company operates through seven segments manufacturing and selling branded dips, cheese-flavored snacks, and tortillas, as well as corn, potato, and tortilla chips; cereals, rice, pasta, mixes and syrups, granola bars, grits, oat squares, oatmeal, rice cakes, simply granola, and side dishes; beverage concentrates, fountain syrups, and finished goods; ready-to-drink tea, coffee, and juices; and dairy products. Pepsico Inc provides its products primarily under the Cheetos, Doritos, Fritos, Lay's, Ruffles, Tostitos, Aunt Jemima, Cap'n crunch, Life, Pasta Roni, Quaker Chewy, Quaker, Rice-A-Roni, Aquafina, Diet Mountain Dew, Diet Pepsi, Gatorade, Mountain Dew, Pepsi, Propel, Sierra Mist, Tropicana, 7UP, Gatorade, Pepsi, and Pepsi Black brands but it is actively searching out new business for the portfolio. The company serves retailers and consumers through a diversified network of direct-store-delivery, customer warehouse, and distributor networks, as well as directly to consumers through e-commerce platforms and retailers which gives it an edge over the average S&P 500 company. The supply chain is relatively nimble and able to shift as needed to meet demand.

THE EARNINGS OUTLOOK: The earnings outlook for Pepsico Inc is much the same as for The Coca-Cola Company except for one thing, Pepsico's growth trajectory has a longer arc because its a slightly younger company. At this point, the company is on track to produce sustained high-single-digit growth in both EPS and revenue for the next 10 years and that time span may lengthen with the addition of new businesses.

THE DIVIDEND: Pepsico Inc is a 2.6%-paying Dividend King. This company has been steadily increasing its distribution for 50 years and is clearly on track to add another ten years to the count. The payout ratio is a bit lower than Coke's, as well, and the outlook for growth a little better, so if you are going to pick one over the other this is the one to choose.

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Clorox (CLX)

A DIVIDEND PRINCE WITH A DENTED CROWN

Clorox (NYSE: CLX) was one of the biggest winners of the pandemic due to its disinfectant qualities but that glow has long faded. That leaves us with a high quality stock now trading at the lowest levels in two years and on the cusp of another rebound. The takeaway here is that buy-and-holdforever stocks are just like any other, there are good time and bad times to buy the stock, it takes patience to wait for the good times and a savvy investors to take advantage of them. As for the business, Clorox is another diversified consumer staples company with brands in multiple categories in the center-aisle sections of the grocery store and it has a positive outlook for revenue, earnings, dividends, and dividend growth. What many don't know is that Clorox is the owner of several other consumer brands that can be labeled essential products for consumers. Among them are Formula 409, Liquid-Plumr, Pine-Sol, S.O.S, and Tilex brands; naturally derived products under the Green Works brand; and professional cleaning, disinfecting, and food service products under the CloroxPro, Dispatch, Clorox Healthcare, Hidden Valley, and KC Masterpiece brands. Clorox also provides charcoal products under the Kingsford and Match Light brands; bags, wraps, and containers under the Glad brand; cat litter products under the Fresh Step, Scoop Away, and Ever Clean brands; and digestive health products under the RenewLife brand. Clorox also markets waterfiltration systems and filters under the Brita brand; natural personal care products under the Burt's Bees brand; and dietary supplements under the Rainbow Light, Natural Vitality, and Neocell brands.

THE EARNINGS OUTLOOK: Clorox Company, believe it or not, is still maintaining the high levels of sales it set during the pandemic if slightly lower than at the peak. Full year 2022 should see only a low-single-digit decline in revenue with a return to YOY growth in the following year. The problem is with margin, at least in 2022. The company is getting pinched by rising input costs, freight, and labor costs and was a little slow raising its own prices to offset the difference. Those price action are expected to take effect in the first half of the year and may be compounded by moderating inflation in the back half of the year.

THE DIVIDEND: Clorox isn't a Dividend King but that doesn't matter. It's 44-year history of distribution increases speaks volumes and we expect the trend to continue. The payout ratio rose above 100% in fiscal 2022 which is a concern but the balance sheet and outlook for margin expansion mitigate the risk. In our view, the 3.28% dividend yield is safe but the next increase or two may not be very large.

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Abbott Laboratories (ABT)

AN ARISTOCRAT BY ANY OTHER NAME WOULD PAY AS WELL

Abbott Laboratories (NYSE: ABT) is one of our favorite stocks of all-time. The company is in business as a staple-quality health care company servicing the needs of consumers and professionals alike. Products range from dietary supplements through medical devices and therapies and its future success is all but assured. Not only is America's (and the world's) population growing, it is aging and spending more and more on healthcare on a per capita basis, all things that bode well for Abbott Laboratories' future earnings, dividend payments, and future distribution increases.

THE EARNINGS OUTLOOK: There is nothing to not like about Abbott Laboratories' outlook for earnings. The company easily survived the pandemic and even got a boost from COVID testing and sales of other related products. We expect the COVID tailwind to subside over time, however, but it will replaced by the company's pipeline of new treatments and products. Regardless, the company is among the best run on Wall Street and a dividend-payer of the highest caliber.

THE DIVIDEND: You'll like Abbott Laboratories because of the business, you'll love it because of the dividend. Abbott is one of the best dividend-paying stocks on the market, no matter the short eight-year history of increases. What the stats don't reveal is that Abbott has only ever increased its dividend relative to the core business. Yes, if you look at the history there was a big distribution cut in 2013 but there is a mitigating factor. In 2013 Abbott spun off its bio-pharma unit creating AbbVie. Shareholders of Abbott got not only shares in this new company but also stock in a new dividend-grower. If you count the years of increases before the spin-off, the years of increases after the spin-off, and 9 years of increases from AbbVie, Abbott more than qualifies for Aristocrat status.

DIVIDEND GROWTH HISTORY

AbbVie Spin Off

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AbbVie (ABBV)

A DIVIDEND ARISTOCRAT IN THE MAKING

AbbVie Inc. (NYSE: ABBV) is the perfect complement to Abbott Laboratories and a high-yield dividend payer inits own right. The company discovers, develops, manufactures, and sells pharmaceuticals globally and has an equally robust pipeline of new treatments to sustain operations long into the future. The companies leading drugs include HUMIRA, SKYRIZI, RINVOQ, IMBRUVICA, VENCLEXTA, VIEKIRA PAK, TECHNIVIE, SYNAGIS, and CREON among others. The company was incorporated in 2012 as part of its spin-off from Abbott Laboratories and is based in North Chicago, Illinois.

THE EARNINGS OUTLOOK: AbbVie is expected to post long-term revenue growth but there may be some near-term hiccups as key treatments wane under the pressure of competition and generic manufacturing. That said, the analysts are also underestimating momentum in those same businesses as well as the company's own guidance which points to strength in the back half of the year. AbbVie management warned of weakness in the first half of 2022 but raised the full year guidance and we think it will get raised again. Longer-term, revenue, if not revenue growth, is supported by a robust portfolio of treatments and a flush pipeline that ensures new treatments will be available on a periodic basis. Oddly enough, AbbVie trades at a relatively low multiple for such a high-growth/high-yielding stock so there is a value to be had as well.

THE DIVIDEND: AbbVie is a budding Dividend Aristocrat and is well-positioned to effect aggressive distribution increases for many years. The stock yields about 3.9% with shares prices near $150 so it is a nice addition to any income portfolio. The payout ratio is low at 42% and may trend lower depending on the timing of new treatments and negative impacts to the portfolio. Regarding increases, the 5-year CAGR is running in the high teens and likely to remain high although we do expect to see the pace diminish over time.

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