Three Stocks To Be Held To Infinity and Beyond

You may think your greatest wealth building asset is the Chevron (CVX) stock you purchased 3 years ago. Even though your brilliant purchase has appreciated over 50% in the last 3 years in the face of a bear market, it is not your greatest wealth building asset.

A traditionalist would say your home is your greatest wealth building asset. This is getting closer, but it is not your greatest wealth building asset.

Others would say your income is your greatest wealth building asset. Thought there is a lot of truth to the statement, it is still not your greatest wealth building asset.

So, what is your greatest wealth building asset? Everyone is born with it. Few realize its importance until they lose most of it. The asset is so valuable it can't be bought. Your most valuable wealth building asset is time.

As a value/dividend investor, I have learned that time can cure many mistakes and provide enormous investment leverage. Consider these stocks:

Johnson & Johnson (JNJ): Let's say on August 25, 1987 you purchased 1,529 shares of JNJ at $6.539/share or about $10,000 worth. This was JNJ's closing high for 1987. By December 31, 1987, your investment was only worth $7,156 - a 28% drop. It wouldn't be until June 9, 1989 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $103,238 at the July 21, 2008 mid-day price of $67.52. This is about a 12% compound annual return, excluding dividends.

General Electric (GE): Same scenario, on August 20, 1987 you purchased 1,821 shares of GE at $5.49/share or about $10,000 worth. This was GE's closing high for 1987. By December 31, 1987, your investment was only worth $6,696 - a 33% drop. It wouldn't be until January 2, 1990 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $50,638 at the July 21, 2008 mid-day price of $27.80. This is about an 8% compound annual return, excluding dividends.

Bank of America (BAC): You know the drill. On August 25, 1987 you purchased 1,397 shares of BAC at $7.156/share or about $10,000 worth. This was BAC's closing high for 1987. By December 31, 1987, your investment was only worth $6,025 - a 40% drop. It wouldn't be until August 5, 1988 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $40,960 at the July 21, 2008 mid-day price of $29.32. This is about an 7% compound annual return, excluding dividends, for a stock that is currently battered and beaten.

In all three examples above, the stock was purchased at its high before the 1987 crash/panic. Some recovered more quickly than others, but all recovered. The key is to buy good, solid companies, and be prepared to hold them through the good and the bad.

All three of the companies above are S&P Dividend Aristocrats, or companies that have increased their dividends in each of the last 25 years. How long should you plan on holding a stock? That's easy, To Infinity and Beyond!

Disclosure: At the time of this writing, I owned JNJ, GE and BAC.

Comments

[investor88]

For long term value/dividend investors YES, the logic is there. For momentum traders, nothing is forever as they exit a stock when it looses momentum technically and/or fundamentally TURTLE trading style. There are believers in both styles of trading/investing.

[pennystocks2008]

There's a rub in it. Don't forget that we had an incredible bull market from 1982 to 2000. That's why your three stocks soared the way they did. You could mention other examples as well. If you bought $10.000 worth of Philip Morris stock in 1980 and reinvested all dividends, you ended up a millionaire with a huge pile of Altria, Philip Morris International and Kraft stocks. Just don't expect that kind of extraordinary returns in the future.

[buyitcheap]

Can't argue with Penny - BAC will pull back into the low 20s to buy again. P&G, JNJ, no doubt good long term holds. GE? I remember people talking about Lucent this way when it was at 70. I'd hate to have committed capital to these companies a year ago though. So I'd still keep my stops in on them.

There seems to be so much firm specific risk, that unless you catch the right ones in the right decade, you're better off in a sector or broad ETF. i.e. IWM and RSP.

[johnj0522]

You are aware, aren't you, that the prices you quote are split-adjusted? The true closing price of JNJ on Aug 25,1987 was 104.62. GE closed at 65.87 on Aug 20, 1987 and BAC closed at 28.52 on Aug 25, 1987.
So your calculations are a bit off!
For your original $30,000 you could have had 95 shares of JNJ (not 1529) , 150 shares of GE (not 1,821) and 349 shares of BAC (not 1397).

[Boubou]

I'm fed up with these retrospective & selective analyses. You get them with every newsletter. "If you'd done this then and that later....................
Let's mention the winners and forget the losers.
Change either the stock or the time frame and get any answer you like.

[notsosmart]

if you are young & long on stocks investing in the best & going on drip plans is the wayto go.but you also have to think for yourself. i got lucent as a spinoff from at&t(original co.) & sold it @$110.the highest it went was $121. luck & brains.it payed off my house 10 years early saving a lot of interest.

[User 227846]

Do not forget that on JUly 21, 2007 the BAC stoke would have been $ 61.00 , since then US banks got hammered starting in Sept 2007. The basic argument for the three candidates has some merit.To make a bet on long term value, the company share in question needs some basic elements: 1) a real business base 2) relenvant market share 3) the advantage of scale 4) a good product or services franchise and a 5) a deep bench of experienced management - all of which is the case for BAC, GE and JJ
RALPH SCHAUSS, London,UK

[User 138602]

that s what we call the power of dividends and that s sounds great to my ears ,no but... and if... Own the three of them,took a beating lately but they will come back and in the meantime I am getting paid for the waiting.

[Emerald]

Your timing is suspect in your analysis. Also, need to know the risk associated with each. JNJ is relative diverse and safe. GE is concentrated and is basically an unregulated bank like the auto companies. Uner the "great" Jack Welch, most of GE's debt was held in short term commercial paper, thereby exposing the company to great financial risk, but the press said nothing until Bill Gross spoke up. Emmelt is faced with a tough job to turn this company around. BAC will eventually pull through given their large deposit base. (Note: Long GE, BAC and JNJ)

[inthemoney]

Buy and hold works ONLY if you manage to pick ONLY winners. But threre is no way to know that a given company will be a winner 5-10 years from now. If you pick 10 promising companies right now, probably 8-9 of them will fail long term.
Buy& hold is such a fraud, but most people investing for their 401K don't know anything better because they don't have any background in trading. I still don't understand how are we expecting people to provide for themselves with their 401Ks when many have no clue om how markets work.

[pansyed]

inthemoney has a point. For the GE lovers you should look at the absolutely horrific environmental liability - start with the Hudson River and keep on going. They have delayed the expenses for some time now but sooner or later it will catch up with them and the stock price will go down . Maybe will they get some type of bail out

[pansyed]

inthemoney has a point. For the GE lovers you should look at the absolutely horrific environmental liability - start with the Hudson River and keep on going. They have delayed the expenses for some time now but sooner or later it will catch up with them and the stock price will go down . Maybe will they get some type of bail out

[bill d]

I could probably list at least 10 promising stocks that had you bought and held at any time in the past you would have lost your ass.
Buy and hold only works for stuff like gold and silver that has intrinsic value but "earns" nothing, has to be stored (safely) and might be difficult to actually use like to buy bread, etc.
An ounce of gold used to go for $35/oz.
Certainly worth more today than the intrinsic value of a lot of stock certificates.

[psl]

How about suncor? Low risk, well managed company. According to their charts 10,000 invested in 1992 would be 710,000 in 2007. Over 60 years of reserves.

[Jimbo]

The author and other commenters have seemed to fail to account for the steady, insidious advance of inflation. I have been pleased to invest in drip accounts with utilities and industrials like Harris, Questar, Chevron(Texaco), etc. But those nice numbers at the end of the time period must also account for the erosion of inflation.

[Football Geek]

I assume that if the dividends were re-ivested in shares that
the value would be five or six times the amount. Compounding
is the secret to building wealth over time. All three companes
have a long history of bumping up the dividend. I'm a buyer
on the dips, and own all three.

[berberick]

you bashers are funny ! How about a index fund for the S&P . Buy on dips and bad days days over the last 15 years and you would be rich ! No stock picking involved !!!!

[PhillyD]

The key is not to tell us how a growing conglomorate had fantastic returns over a 3 decade period, but rather to tell us who is the next conglomorate in the making who will build their businesses up to such a large scale that they keep adding market cap to their venture.

I found one potential one in Otter Tail Corp. They are an electric utility who moves the profits towards purchasing other business ventures. One of their bright stars is DWI industries which is a large manufacturer of Wind Turbines! In 30 years they could be another GE type story with 10% average returns per year? Probable? No. Possible. Yep. I'll take my chances and reinvest the 3% dividends along the way.

[Robertm73]

In 1930 and 1931 if you invested in the that downturn for the long term you would not have recoved til late in 1960's with any stock. Good luck thinking you should buy now and hold

[Reckless]

In 1987 could the author of this story have easily bought $10,000 worth each of similarly great companies like Gannett (GCI) and Citicorp (C)?? Both these companies are leaders in their industry, have a long and successful operating history and equally long history of raising dividends. Could the original author please be so kind and do a simlar accounting of today's value based on the 1987 purchase of GCI and C? Thanks.

[Jimmy Lathrop]

I suppose the point of the article is that a) we were stupid for not buying these stocks in 87, b) ignore the tax on the dividends for the sake of the argument and c) inflation has been zero since 1987. If we narrowed the range from 1987 to 2007, we could add one more stellar company to the mix - Bear Stearns. And that, my fellow readers, is why this piece is like a green banana - can't peel and eat it yet. Stick it in a drawer for a year and see if it turns yellow. Thanks for playing "hindsight is 20/20" with us though.

[najdorf]

So much poor reasoning in these responses. I realize the original article isn't perfect, but:

johnj0522: Your point is irrelevant. The 150 shares of GE in 1987 would be 1821 shares today. The author misspoke but it doesn't affect the conclusion of the argument. He didn't double-count splits. Google Finance (and some other financial sites too) adjusts for splits going backwards to make these calculations easier.

multiple posters about dividends: this article isn't about dividends. It's about returns ex-dividends, because those are easier to calculate and the author is trying to make the point that these stocks were acceptable holds even without thinking about the dividends (if you reinvest they become excellent investments, in hindsight).

Reckless: You can look this up yourself. Gannett is about flat, but anyone who held print media through the highs this company hit in 2005 is a buffoon who deserves to lose his money. With the dividends at least he's still making a profit. Citigroup is up more than 4x from 1987 (and you could have gotten it at the same price or cheaper as late as 1992), before you even look at the dividends, which are pretty big. Maybe you could work harder at cherry-picking?

RobertM73: You are as wrong as a person can be. Read any history of investing and you will see that anyone who invested intelligently during the 30s made tons of money in the 40s and 50s. That's why people like Graham and Fisher are famous - they made their fortunes in those markets. Even from the peak of 1929 it wouldn't take until anywhere near the late 60s for investors to be made whole. Even if you use the ridiculous metric of ex-dividend DJIA (which is a narrow, price-weighted, subject-to-change index that no one should base generalities off of), the Dow hit its 1929 price peak in 1954. Of course, nobody in the world invested all their capital at the peak of the 1929 market and then did nothing for the next 25 years except spend dividend checks, so actual investor returns were massively positive for this period because the '30s created buying opportunities and dividends kept compounding.

those bemoaning inflation/talking up gold: Show me the asset class that provides better risk-adjusted long-term real returns than stocks and I will be happy to invest some money in it. It sure isn't gold, which is lucky if it matches inflation and provides any real return whatsoever. If you bought gold at its peak in 1980, you were just made whole this year, in NOMINAL terms with NO dividends. You've had a block of metal in your house for 28 years and now its purchasing power has been eaten up by inflation. If you want to talk about mustering a flat real return in the long term,, you would have had to buy gold at one of those times when no one else way buying it and held it for the nice 2000s run we've had. I realize it looks good in the last ten years, but that's because you've caught an sentiment-driven uptrend in an commodity asset with minimal function that produces no earnings. Gold cost more in real dollars in 1980. Gold cost roughly the same amount in real dollars as far back as 1974. What makes you think that this is a logical investment to buy and hold?

[itemirus]

well, i could swap GE, JNJ, and BAC with XOM, MSFT and KO or , you choose, any successful story of the past decade. For example: "had i bought $10000 worth of PTR in 2003 for $20 a share and sold it in 2006 for $120 and reinvested the $60000 i made in FSLR in january 2007 i would own circa $600 thousand worth of FSLR stock now"

Point is: everything is easy in hindsight - finding today the next 10 bagger is a different story;

Investing in great companies is safer than trading on margin, but investing requires great fundamental analysis skills and a lot of PATIENCE - It took Buffett DECADES to become what he now is, and we're talking about an outlier, a one in a million phenomenon.

Ask yourselves:Are you willing to hold a stock of a promising mid-cap company you buy today until the year 2025 and reinvest all the dividends you get? How old will you be in 2025? How much stock are you going to buy? What if 5 years from now it is only up 40% from your buying price?

Are you willing to put aside all the extra money you could spend today to have fun while you're young , to save it for investment in a promising company because MAYBE it will make you rich 25 yrs from now when you'll be 55?

On the other side we have Trading, which may seem like a shortcut to riches, (a lot of successful stories are there on the web - what they don't advertise is that for every guy that made it with trading there are 500 more that went bankrupt) but it requires guts, blood, costly experience and emotional skills very uncommon - not to forget that luck plays its part and that it's very easy to go bust when you play with margins, leverage and futures.

Diversify? You risk investing too little in the next ten bagger

Don't diversify? You risk putting too much money in the next Bear Stern.

Making money is NOT easy.

[dustbusterz]

multiple streams of income is the best way to get rich(cause getting rich seems to be the theme here) so , want to get rich? ) do it this way. take a comfortable amount of cash(something you won't be too hurt by if you lose it) invest in a few select stocks(ones you have done your homework on and feel comfortable in investing in) then take another amount of money, investing in real estate, then keep your job cause this is known as multiple streams of income. now, making a little in stock s , and a little in real estate, and earning a weekly pay check,by retirement, if you've done your homework, you should maybe be able to retire a little ahead of time(with enough cash to live comfortably and do some travel if this is your wish) go golfing if again this is your wish. you may be rich or you may be just comfortable ,but at least you won't retire wondering how your gonna afford that next can of cat food for dinner . but do yourself a favor and research research research before investing, this is they only way to be certain you've chosen the right stock purchase or the right real estate purchase ,so you won't go broke.plain and simple. there are no short cuts to riches. there are no magic bullets to riches, and no one in his right mind will just walk up one day and hand you millions , so do it right and you won't have to worry about market ups and downs. warren buffet never worries what direction the market is heading , he is still out there today (in one of the rockiest markets in 30 years) and still buying stocks and companies left and right. market direction does not matter, only thing that matters is the company you chose to buy into . right now you have an amazing thing happening . a recession going on and a bear market. why is that such a wonderful thing? well how about looking at the companies who are offering up market beating earnings reports right now. those are the solid companies the ones you can bet on to last . if we are half way through this recession and you see a company still making record profits, this has to tell you a great deal about not just the company its self, but the management who runs this company as well.they know what their doing to manage to make money in this rising inflation environment and stagnant economy.thats all you need to know, thats all you need to ask yourself right now. who is making money and who is not making money . then do a bit of research on those making the money . then buy the best of the best , hold on and wait to make your profits. bam , the recession is your friend weather you realize it or not.