Legacy Stocks for the Next Generation
08/09/2016 8:00 am EST
Buy-and-hold investing may seem passé in a 24-hour news cycle that plays on investors’ emotions and sensationalizes even short-term hiccups as a potential calamity states Roger Conrad, editor of Conrad's Utility Investor.
Some investors have given up trying to build wealth with individual stocks and instead opted for lower-cost, passive strategies. In my view, buy-and-hold investing isn’t dead — but it does require due diligence.
On the plus side, this approach limits your trading costs and helps you to grow sustainable wealth. Plus, your heirs will enjoy a one-time step-up in their cost basis on stocks left to them in a will.
But leaving a basket of high-quality stocks to the next generation is an incomplete gift without advice on how to monitor and manage these investments.
Here are some of the highlights from the investing legacy I hope to pass on to my children:
- There’s no such thing as a forever stock, which is why you must understand the businesses in your portfolio and their growth prospects.
- Tend your portfolio as you would a garden, pulling any weeds that threaten your returns and pruning any overgrown positions.
- Industry leaders rarely fall apart all at once. But signs of irreversible decay are good reasons to reduce exposure or move along before any real damage occurs.
- Investors should regularly check their holdings for potential cracks, with an eye toward flaws that could jeopardize their long-term value.
Scrutinizing Dominion Resources’ (D) quarterly results and business prospects has enabled me to hold the stock in my personal account for almost 30 years.
More than a few of our Lifelong Income Portfolio holdings have the potential to become legacy stocks that you can hold for the long term and even pass down to your heirs. These names feature three characteristics:
- A dominant position in an industry that’s proved its staying power in all economic environments;
- A strong balance sheet that provides protection against volatility in interest rates and refinancing risk; and
- A forthright management team with a track record of execution and setting reasonable targets and objectives.
Here a sample of conservative stocks in our Lifelong Income portfolio that stack up best on all of these counts:
Entergy (ETR) has pivoted away from wholesale power generation and taken advantage of favorable demographics and growing demand across its regulated service territory on the Gulf Coast and in the Mid-South region.
Pharmaceutical giant GlaxoSmithkline (GSK) stands to benefit over the long term from increasing consumption of health care products as populations age and living standards improve in emerging markets.
By Roger Conrad, Editor of Conrad's Utility Investor