buy and hold stocks
Why Buy and Hold Stocks Are a Smart Investment Strategy
Buy and hold stocks are stocks that an investor can hold for a long period, which can run into decades. These are stocks that have solid fundamentals with a great capacity for growth in the future. Buy and hold stocks offer long-term investors unique benefits, such as:
- Dividend income: Many buy and hold stocks pay regular dividends to their shareholders, which can provide a steady source of income and compound over time. Dividends alone have accounted for about 40% of total stock market returns from 1930 through mid-2022.
- Capital appreciation: Buy and hold stocks tend to increase in value over time, as the companies grow their earnings and market share. This can result in significant gains for investors who are patient and do not sell at the first sign of volatility.
- Tax efficiency: Buy and hold investors can defer capital gains taxes on their long-term investments until they sell them. This can lower their effective tax rate and allow them to reinvest more of their profits.
However, not all stocks are suitable for buy and hold investing. Investors should look for companies that have:
- A leading market position: Buy and hold stocks should have a competitive advantage over their rivals, such as a strong brand, loyal customers, economies of scale or innovation. This can help them maintain or increase their market share and profitability in the long run.
- A stable or growing industry: Buy and hold stocks should operate in industries that have favorable demand trends, low regulatory risks and high barriers to entry. This can protect them from disruption and competition.
- A reasonable valuation: Buy and hold stocks should trade at attractive prices relative to their earnings, cash flow, growth potential and intrinsic value. This can provide a margin of safety and increase the upside potential for investors.
Some examples of buy and hold stocks that meet these criteria are:
- Dow Inc. (ticker: DOW): Dow is a global chemical producer and distributor that specializes in polyolefins, chlor-alkali products and coatings. Dow’s history dates back more than 125 years, and it produces a wide range of industrial and consumer chemicals and plastics. Dow pays a generous dividend yield of 5.1% and trades at a low price-to-earnings ratio of 9.6.
- Honeywell International Inc. ( HON): Honeywell is an industrial conglomerate that specializes in aviation, industrial process automation, building automation, industrial materials and safety equipment. Honeywell is also the only stock on this list that has outperformed the S&P 500 over the past decade, generating a total return of 333.3% through April 24, compared to the index’s 201.5% return. Honeywell pays a dividend yield of 2.1% and trades at a reasonable price-to-earnings ratio of 28.9.
- Verizon Communications Inc. ( VZ): Verizon is one of the largest wireless service providers in the U.S., with over 120 million subscribers. Verizon also offers broadband, video, media and digital advertising services. Verizon pays a high dividend yield of 7% and trades at a cheap price-to-earnings ratio of 11.4. Verizon has a leading position in the 5G network rollout, which could drive its future growth.
In conclusion, buy and hold stocks are a smart investment strategy for long-term investors who want to benefit from dividend income, capital appreciation and tax efficiency. Investors should look for companies that have a leading market position, a stable or growing industry and a reasonable valuation. Some examples of buy and hold stocks are Dow Inc., Honeywell International Inc. and Verizon Communications Inc.