What if you fell asleep while out for a walk with your dog, and like Rip Van Winkle, awoke 20 years later to a whole new world?
After inquiring after friends and family, investors would then probably want to know, "how's the stock market doing?"
If you invest in individual stocks, it would be the ultimate buy and hold tale.
20 years without touching your stocks. 20 years of dividend accumulations. 20 years of growth. There would be no emotions in play.
How well would your stocks hold up if they went untouched in the stock market for the next 20 years?
Not all stocks are created equal. There are certainly some companies that you would NOT want to be in if you knew that you were going to hold for 20 years.
A long term hold is a unique situation.
Warren Buffett has been quoted as saying:
"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."
What criteria, in addition to rising earnings, should you look for if you're going to hold for decades?
3 Criteria for 20 Year Buy and Hold Investors
1. The Company Has a Moat
2. The Company is Rewarding Shareholders
3. The Company is Bigger Than Just One Person
1. A Moat
Long term investors look for companies with moats. A business moat is defined as a sustainable economic advantage that makes it difficult for rivals to enter the market or gain market share.
Many industrial companies have moats because they have expensive factories that must be used to make their product. For example, Deere (DE - Free Report) has manufacturing facilities all over the world. It's expensive to build a factory to make agriculture equipment. Who else is going to enter that market? Not many people.
Additionally, you have to establish your brand as among the best in that industry. That can take years, even decades, to achieve.
Big start-up costs and brand strength give Deere advantages over new rivals.
An example of an industry without a moat are the burger chains. These seem to be sprouting up in just about every state and country with few barriers to entry. As long as you can get a loan and sign a lease on a location, you can compete in this space.
In 20 years, some of the burger chains will likely not be survivors given the level of competition.
2. Paying Cash Back to Shareholders
It says something when a company pays a dividend. While growth investors hate dividends because it usually indicates that growth at a company is slowing, it can also be a sign of consistent and solid management.
It's hard to pay a dividend year after year, even in hard times. Harder still are the "dividend aristocrats" which are the companies that raise their dividends every year and have been doing so for decades.
If you're holding for 20 years, you want to get a dividend payout. Even a 1% yield can make a difference in your return over that long of a period.
3. Don't Count on the Genius of One
While I'm a big fan of having a visionary CEO at the helm of a company, if you're thinking about owning a stock for 20 years, you might want to think twice about making a bet on one person.
Apple's shares soared under the guidance of Steve Jobs, but under Tim Cook? They have struggled in 2015, up just 4.8% this year.
Additionally, I'm not a fan of owning a company that makes big bets on the brand of one or two individuals. Nike (NKE - Free Report) just signed LeBron James to a lifetime contract. Terms were not disclosed. He is the first athlete to sign such a deal.
Nike, of course, has the powerful Michael Jordan brand as well, which is still as strong as ever even though Jordan hasn't actually played in the NBA in over a decade.
But there is danger to a company in placing such a big bet on the brand of someone who is, really, outside of the company's control. Humans have foibles. And these athletes have their own outside brands. There is risk there.
I would prefer to own a company that is making a bet on its own product, instead of a human brand.
3 Stocks to Hold for 20 Years
After applying the criteria, there are a lot of companies that make the grade.
But the three I've chosen have one thing in common: they have a track record of steadily growing earnings over the course of several decades.
And they are, for the most part, pretty boring.
Boring is good if you're investing for the long term. These companies just go about building their businesses, year after year.
1. Union Pacific Corporation (UNP - Free Report)
A railroad? Right now?
The railroads have been in a tough spot in 2015 as a decline in coal shipments and the West Coast port strike put a damper on volumes and earnings. The polar vortex winters also didn't help.
Shares of Union Pacific recently hit a new 52-week low on continuing worries about the economic recovery, especially in manufacturing.
The new low has even persuaded insiders to buy. Just last week, a UNP director bought 50,000 shares for about $3.9 million. It was this director's first open market purchase since he joined the board in 2008.
Insiders can be greedy. They buy when shares are oversold because they think they're getting a deal and that they'll make money when the shares rebound.
The rails have suddenly gotten cheap. Union Pacific trades with a forward P/E of 13.3. That is the cheapest the stock has been on a forward basis since the dark times of the Great Recession in 2009 when its forward P/E was 8.6.
While earnings are expected to decline 1.7% this year, that is a rare event. In the last 10 years, the only other year that saw contraction was during the Great Recession. Analysts see earnings growth returning again in 2016, with earnings expected to rise nearly 8%.
The 3 Criteria:
1. If any industry has a moat, it's the railroads. Union Pacific also has the unique position of operating 6 gateways along the Mexican border, which has become a key trading partner.
Additionally, it owns 26% of Ferromex, Mexico's largest railroad, so it has further ties to the Mexican economy that no one entering the space would have.
2. Union Pacific has raised its dividend steadily since 1999. It also still paid the dividend, and never cut it, during the Great Recession. With the shares selling off, investors are getting a juicy yield right now of 2.8%.
3. There is no brand built on the personality of one individual at the railroads. The brand is based on shipping goods across North America and that is it. That is really all you need to know.
The railroads now ship nearly half of all US freight tons. They are the bedrock of the US economy.
2. The Sherwin-Williams Company (SHW - Free Report)
Sherwin-Williams has been churning out paint for over 150 years. There wouldn't seem to be much innovation left in that industry, but in October 2015, the company announced a paint breakthrough.
It had developed a new antibacterial paint called "Paint Shield" that killed 99.9% of bacteria. The possible uses for this product are huge, including in hospitals, day cares, schools, hotels and on cruise ships.
The paint and coating markets have been strong in recent years. Earnings have grown by the double digits every year since 2012. Analysts expect another 25% growth this year and 16% in 2016.
Shares aren't cheap, though. They trade with a forward P/E of 24.8. That's the most expensive the stock has been in the last 10 years. Investors might want to wait for a pullback to initiate a position.
The 3 Criteria:
1. There are only a handful of paint companies in North America and Sherwin-Williams is one of the largest. There are clearly barriers to entry. It takes big factories to mass produce paint.
2. Sherwin-Williams has paid a dividend since 1999 and did not cut it during the Great Recession. It's currently yielding about 1%.
3. There is no cult of personality with the Sherwin-Williams brand. The paint is well known in interior design circles but there is no person associated with the brand.
3. Starbucks Corporation (SBUX - Free Report)
Starbucks has been brewing coffee since 1971 and now has over 23,000 stores in its global empire. But it's not content to stop with just coffee.
It also owns the Teavana brand and has been pushing into the tea market. Food, beer and wine are also appearing regularly in Starbucks across North America as the company makes a play to being more than just a coffee shop.
After hitting some bumps in its global expansion during the Great Recession, it has produced double digit growth every year since 2010.
Shares have soared and aren't cheap. Starbucks has a forward P/E of 33 but shares have been priced higher. In the 2005 to 2007 period, they traded as high as 45x.
The 3 Criteria:
1. Starbucks sheer size gives it advantages. Starbucks is such a dominant name in the coffee market that it has dared to enter more competitive markets such as Colombia, where the Juan Valdez brand reigns king. It also has shown it can successfully compete outside the coffee market, with teas and non-coffee beverages making up more of its sales.
2. The company started paying a dividend in 2010. In that time, it has never cut and has only raised its payout. The dividend is currently yielding 1.3%.
3. Starbucks has a famous CEO in Howard Schultz. Doesn't that disqualify the company based on the criteria? I would argue it does not.
While his personality is a big driver of the company, especially his initiatives to hire more military veterans and to pay college tuition for employees, the Starbucks brand is bigger than any one individual. Starbucks can prosper even without Schultz at the helm.
The Zacks Rank: Should You Care?
The Zacks Rank is a fantastic short term recommendation system. But it's meant for 1 to 3 months as its based on changes to analyst estimates.
All three of these companies are Zacks Rank #3 (Hold) stocks.
While I recommend using the Rank as a guide for all stock picking, if you're considering a long term investment, the rank will play less of a factor.
Still, there is nothing wrong with a Hold rank. Earnings are expected to rise on all three next year.
Buy and Hold Is Difficult
Very few investors are able to buy a stock and hold it for decades. Warren Buffett is one of the few.
Most investors get too emotional with their stock investments. They can't turn off the news.
When a stock sell off happens, even if it's healthy for the stock market, many investors panic and sell even the best quality companies.
If you had bought these three stocks 20 years ago, your gains would be enormous.
Past results aren't a guarantee of future returns, of course.
But for those who can buy and hold for a long length of time, and ride out the ups and downs, some of the old tried-and-true names should certainly be on your radar.
In full disclosure, I currently own Starbucks in my personal portfolio. And yes, I am holding for the long term.
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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec and she also hosts the Zacks Market Edge Podcast on iTunes.