While many investors may not think it makes sense to hold on to investments long-term when there are so many exciting opportunities in the market, one proven strategy for accumulating significant returns is to to do just that: avoid all the noise and remain invested.
Lots of stocks are suitable for this strategy, but the best are dividend-paying companies. That's because those that offer regular payouts often also provide an incentive to re-invest your dividends and unlock the power of compounding, helping your savings to grow faster. In addition, buying shares in companies that have long histories of reliably paying and growing dividends can help protect your investments from the corroding effects of inflation.
Here are our two picks for the buy-and-hold investors:
1. NextEra Energy (NYSE:NEE)
We like utilities for the long term for one simple reason: they invest billions of dollars to build assets which generate solid cash for their investors. As long as customers continue to pay their utility bills, the cash will keep rolling in.
In this space, we particularly like NextEra Energy (NYSE:NEE), the Florida-based utility that has scaled up by providing clean energy, which will be hard for competitors to match. NextEra is the largest U.S. provider of renewable energy, generating electricity from the wind and sun. It operates a large natural gas pipeline business as well as a growing energy storage operation.
NextEra Energy, Weekly
The big difference between NextEra and other traditional utility companies is that its growth wasn’t funded by a massive injection of debt. Instead, the company very smartly used the government subsidies and tax breaks offered to clean power producers. It mostly sells the output to utilities, many of which must procure power from green sources to meet state mandates.
The utility plans to invest $40 billion on its development projects through the end of next year. This should help fuel growth, especially at a time when the renewable market opportunity is huge and the company has already built an impressive scale. Half the power-generating capacity added in the U.S. in 2017 was wind and solar, according to the Energy Information Administration, versus 29% in 2010.
NextEra is expanding beyond its traditional utility customers to build wind farms and solar parks directly for large corporations, such as Google parent Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOGL), some of which want to run facilities with green energy for financial and public-relations purposes, the Wall Street Journal reported in June.
This mix of clean energy/energy storage business has rewarded investors handsomely. NextEra shares have doubled in value since 2014, driven by its strong earnings and dividend growth.
Shares closed yesterday at $188.23. With a dividend yield of 2.66%, NextEra pays an annual dividend of $5 a share. The company plans to grow that between 12-14% through the end of 2020.
2. Toronto-Dominion Bank
Just like utilities, banking stocks are one of the best places to park your investment for the long-run. We like banks located north of the border more than their U.S. peers because Canadian banks have better assets, a very strong regulator and a history of paying dividends.
TD Bank, weekly
Among the top Canadian lenders, Toronto Dominion Bank (NYSE:TD) is one of our favorites. After its organic growth in the U.S. over the past decade, TD Bank has become the sixth-largest North American lender, and now owns over 40% of TD Ameritrade (NASDAQ:AMTD). Its dominant position in the Canadian market and a large U.S. presence gives the bank a revenue diversification that has been fueling growth in its earnings and dividend over the past five years.
When it comes to earning income from your stocks, it’s hard to beat TD Bank’s track record. The company has paid dividends since 1857, and has delivered 9.4% compound annual growth in dividends since 2007. Closing yesterday at $58.29, the stock currently yields 3.52%, paying an annual dividend of $2.04 per share.
Bottom Line
Both NextEra and TD Bank are the kind of stocks investors can stash in a buy-and-hold portfolio and then forget about, without worrying about daily market volatility. As the years tick by and you keep re-investing dividends back into the portfolio, it'll be very satisfying to see how quickly your savings grow.