10 Stocks to Buy and Hold Forever

Dear Reader: Most successful investors describe themselves as buy-and-hold investors. But for many, their strategy is more like buy-and-hold-till-I-get-bored, or until I see or hear about something better on TV or the Internet.

Instead, rather than ―buy and hold‖, we prefer a “buy and watch closely” strategy. That means that we constantly look for reasons to sell. But we rarely find them, because we are careful about what we buy.

A buy-and-watch-closely orientation can be extremely profitable in the long term. That’s because you are more likely to hang on to your best picks, rather than selling them prematurely. After all, your best picks are those that do way better than you ever expected. Frequent trading will lead you to sell your best picks when they are just getting started. It also pushes up your commission expense and makes money only for your broker.

A “buy and watch closely” approach is also far more likely to make money for you than market timing — trying to figure out the market’s next move, and buying and selling to profit from it. It also works much better than sector rotation (trying to figure out, for instance, which groups or kinds of stocks will rise fastest when the market bottoms).

Of course, there are a variety of ways to build an investment portfolio. Some work better than others. But our ―buy and watch closely‖ approach has done well for our portfolio management clients over the past few decades. We recommend this approach for our readers as well.

We start by applying our three-part Successful Investor rule for portfolio construction:

1. Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
2. Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or stay out of stocks that are in the broker/media limelight. This limelight raises investor expectations to dangerous levels. When stocks fail to live up to those heightened expectations, share-price slumps can be swift and brutal.

We advise selling particular stocks when we feel the situation has changed and they no longer qualify as high-quality investments. We also sell if we decide that a stock isn’t as high-quality or well-established as it needs to be, to cope with the challenges it faces. Of course, many of our sales are due to a successful takeover of a company’s stock, which generally results in a major profit for our clients.

When we sell stocks out of a particular client’s portfolio, it’s often because we see a divergence between the characteristics of the portfolio on the one hand, and the client’s objectives and risk tolerance on the other.

For instance, we sometimes sell part of a client’s holding in a stock if the stock goes up so much that it makes up too big a proportion of the client’s portfolio. Or, we may sell an aggressive stock for a client if his circumstances or preferences have changed and he has become more riskaverse.

We may at times adjust many or all of our clients’ holdings, based on our assessment of risk or opportunity in the overall market. But we never sell just because a stock or the market has gone down, and may drop some more.

A drop in the market or a particular stock is a constant risk. Your best protection against it is to be careful about what you buy, in respect to investment quality, diversification and investor expectations. The best way to do that is to follow our three-part formula.

In the following pages, we look at 10 high-quality, well-established companies, with a history of earnings and dividends. These are stocks that we feel you can buy and hold “forever” (or at least, “buy and watch closely forever!”) All 10 are recommendations of our Successful Investor newsletter.

We hope you enjoy and profit from this advice.

Thanks and all the Best

Pat McKeough

BCE INC. $53 (Toronto symbol BCE; TSINetwork Rating: Above Average) is Canada’s largest telephone provider, with 7.0 million customers in Ontario, Quebec and the Atlantic provinces. It also has 3.3 million high-speed Internet users and 2.7 million TV subscribers.

This business supplies 57% of BCE’s revenue. The company also sells wireless services (31% of revenue) to 8.1 million customers across Canada, and its Bell Media segment (12%) owns CTV Television, specialty channels and radio stations.

BCE is one of our long-time favourites. When we first recommended it in our April 1995 issue, we felt it was poised to profit as many of its phone customers signed up for Internet access. The company later cut its risk by unloading its remaining shares in telecom equipment maker Nortel Networks at the peak of the tech boom in 2000.

The company’s outlook remains bright. It continues to expand its wireless networks, which will help it compete with cable and any foreign carriers that enter Canada. BCE is also diversifying into TV and radio broadcasting. That adds risk, particularly as advertisers shift to online ads. However, exclusive content could help fuel demand for its mobile and Internet services.

BCE has raised its dividend 11 times since December 2008. The current annual rate of $2.60 a share yields 4.9%.

BCE is a buy.

TELUS CORP. $43 (Toronto symbol T; TSINetwork Rating: Above Average) is Canada’s second-largest wireless carrier, after Rogers Communications, with 8.2 million subscribers. Wireless now supplies 55% of Telus’s revenue and 66% of its earnings.

The remaining 45% of revenue and 34% of earnings come from its wireline division, which serves 3.1 million traditional phone customers in B.C., Alberta and eastern Quebec. This business also has 1.5 million Internet users and 937,000 TV clients.

Telus continues to invest heavily in its networks. It recently paid $1.5 billion for new AWS-3 radio frequencies (or wireless spectrum), which will boost its wireless networks’ speed and capacity. The company also agreed to pay $479 million for new 2500 MHz radio frequencies, which will expand its reach in rural areas.

Excluding spectrum licence fees, Telus expects to spend $2.4 billion on network upgrades in 2015, about the same as last year.

Telus is also expanding its other businesses, including its health care division, which helps doctors, pharmacies and hospitals convert patient records and other data to electronic formats. Insurance companies also use these services to process over 250 million drug-plan claims a year.

The company recently increased its dividend by 5.0%. The new annual rate of $1.68 yields 3.9%. Telus has now raised the rate nine times since May 2011.

Telus is a buy.

TORONTO-DOMINION BANK $52 (Toronto symbol TD; TSINetwork Rating: Above Average) recently overtook Royal Bank as Canada’s largest bank by assets. That’s partly because it has spent about $20 billion in the past three years buying other businesses.

Growth by acquisition is riskier than internal growth, as acquisitions carry an above-average chance of unpleasant surprises. However, TD took advantage of rare circumstances in wake of 2008 financial crisis to pick up new businesses at what could turn out be bargain prices.

TD gets 52% of its revenue and 63% of its earnings from its Canadian retail banking division, which includes wealth management and insurance. This division serves 14 million customers through 1,166 branches. In the U.S., the bank operates 1,328 branches along the east coast from Maine to Florida. This business supplies 36% of its revenue and 27% of its earnings.

The bank also offers securities trading and investment banking services, like stock underwriting (12%, 10%).

TD recently raised its dividend by 8.5%. The new annual rate of $2.04 yields 3.9%.

TD Bank is a buy.

BANK OF NOVA SCOTIA $60 (Toronto symbol BNS: TSINetwork Rating: Above Average) is the third-largest of Canada’s five big banks by assets. It has over 1,000 branches in Canada.

Bank of Nova Scotia continues to expand its international banking operations, which account for 34% of its revenue.

It recently paid $280 million U.S. for 51% of the credit card operations of Cencosud S.A., Chile’s largest retailer.The deal makes the bank Chile’s third-largest credit card issuer, with 2.5 million cards in use and $1 billion U.S. in loans outstanding.

Thanks to its improving outlook, it recently raised its dividend by 3.0%. The new annual rate of $2.72 yields 4.5%.

Bank of Nova Scotia is a buy.

GREAT-WEST LIFECO INC. $35 (Toronto symbol GWO; TSINetwork Rating: Above Average) is Canada’s second-largest insurance company. The company also offers wealthmanagement services and owns Putnam Investments, a major U.S.-mutual fund company. Power Financial (Toronto symbol POW) owns 67.1% of Great-West.

In July 2013, Great-West completed its $1.75 billion purchase of Irish Life Group Ltd., Ireland’s largest pension manager and life insurance provider.

The company continues to expand in Ireland. In July 2015, it paid an undisclosed sum for the Irish operations of Legal & General Group plc, which provides investment and tax-planning services to wealthy individuals.

This latest purchase will also give Great-West more opportunities to cut costs by merging overlapping operations. It recently finished integrating Irish Life and now expects annual savings of 48 million euros, up 20% from its initial target of 40 million euros (1 euro = $1.49 Canadian).

Great-West’s current dividend rate of $1.30 a share yields 3.7%.

Great-West Lifeco is a buy.

CANADIAN PACIFIC RAILWAY LTD. $186 (Toronto symbol CP; TSINetwork Rating: Above Average) transports freight between Montreal and Vancouver, and connects with hubs in the U.S. Midwest and Northeast. It gets 25% of its revenue from the U.S.

In 2012, prominent U.S. hedge fund Pershing Square Capital Management successfully installed Hunter Harrison, Canadian National Railway’s former chief executive, as CP’s CEO.

Mr. Harrison then began to implement a major restructuring plan, which included new locomotives, better tracks and software that optimizes train loads and speeds. These moves put the company in a better position to handle changing demand for the cyclical products its transport, such as coal, oil and grain.

In the latest quarter, CP’s operating ratio improved to a record 60.9% from 65.1% a year earlier. (Operating ratio is calculated by dividing a railway’s regular operating costs by its revenue. The lower the ratio, the better.)

Due to the slowing economy, CP expects its revenue to rise 2% to 3% for all of 2015, down from its earlier prediction of 7% to 8% growth.

The company also cut its 2015 earnings forecast to between $10.00 and $10.40 a share from $10.63. The stock trades at 18.2 times the midpoint of the new range. However, CP still expects to double its earnings per share from $8.50 in 2014 to $17.00 in 2018. The $1.40 dividend yields 0.8%.

CP Rail is a buy.

TRANSCANADA CORP. $45 (Toronto symbol TRP; TSINetwork Rating: Above Average) operates a 68,500-km pipeline network that transports natural gas from Alberta to markets in central Canada and the northeastern U.S. It also owns or manages over 20 electrical power plants, and operates natural gas storage terminals.

The company still hopes its Keystone XL pipeline will be approved, even though Alberta’s new NDP government has withdrawn the province’s support for the project. Keystone XL would pump crude from Alberta’s oil sands to the U.S. Gulf Coast.

Meanwhile, the company has improved its efficiency and adopted new technologies, both of which are helping it pump more oil through its existing Keystone pipeline between Alberta and refineries in Illinois. TransCanada recently freed up 10,000 to 15,000 barrels on this 590,000- barrel-a-day line. Long-term contracts account for 90% of Keystone’s current capacity, so the extra space will help TransCanada meet demand for urgent shipments.

The company has raised its dividend each year since 2000. The current annual rate of $2.08 a share yields 4.6%.

TransCanada is a buy.

CANADIAN UTILITIES LTD. (Toronto symbols CU [class A non-voting] $34 and CU.X [class B voting] $34; TSINetwork Rating: Above Average) distributes electricity and natural gas in Alberta and Australia. It also operates 18 power plants in Canada, Australia and the U.K. ATCO Ltd. owns 53.2% of the company.

Canadian Utilities plans to spend $5.8 billion on upgrades between 2015 and 2017. It will devote $5.1 billion of that to its regulated operations, including $1.2 billion to make Alberta’s power grid more reliable.

The remaining $700 million will go to unregulated businesses, including $500 million for new power lines in the Fort McMurray area. The company owns 80% of a joint venture that will build this project. Quanta Services (New York symbol PWR) will own the remaining 20%.

The company has raised its dividend every year since 1972. The current dividend of $1.18 a share yields 3.5%.

The class A non-voting shares are more liquid than the class B voting shares.

Canadian Utilities class A stock is a buy.

IMPERIAL OIL LTD. $43 (Toronto symbol IMO; TSINetwork Rating: Average) is Canada’s third-largest publicly traded oil company, after Suncor and Canadian Natural Resources Ltd. U.S.-based ExxonMobil Corp. (New York symbol XOM) owns 69.6% of Imperial.

Imperial recently completed the second phase of its Kearl oil sands project in northern Alberta. The company owns 71% of Kearl, while ExxonMobil holds the remaining 29%. Kearl’s reserves should last over 40 years.

Kearl uses a proprietary system to process the tar-like bitumen, eliminating the need for a costly on-site upgrader. This process also produces fewer emissions than traditional methods.

In the three months ended June 30, 2015, Imperial’s share of Kearl’s output was 92,000 barrels a day. The project should produce 220,000 barrels a day (156,200 to Imperial) when it reaches full production by the end of 2015. Future improvements could increase Kearl’s daily output to 345,000 barrels (244,950 to Imperial).

Imperial is also expanding its 100%-owned Cold Lake oil sands project, which will add 40,000 barrels of production a day by the end of this year.

As Kearl and the Cold Lake expansion reach full production, Imperial’s capital spending will fall to $4.0 billion in 2015 from $4.6 billion in 2014. It will likely drop to $3.0 billion in 2016.

The company has a long history of increasing its dividend. The current annual rate of $0.56 a share yields 1.3%.

Imperial Oil is a buy.

CAE INC. $15 (Toronto symbol CAE; TSINetwork Rating: Average) began operating in 1947 as Canadian Aviation Electronics Ltd. It originally made ground-communication equipment and antennas for the Royal Canadian Air Force.

In 1952, the company began making flight simulators for air force pilots. It’s now the world’s leading maker of flight simulators for commercial and military aircraft. CAE made about half of the commercial aircraft simulators in use today and has 16% of the military simulator market.

Sales of simulators to airlines tend to move up and down with the economy. To steady its revenue, CAE began training pilots in 2001. It now trains over 100,000 pilots and crew members a year at 50 schools worldwide.

The company gets 60% of its revenue by selling simulators and training to commercial airlines. Another 35% comes from providing simulators and training to militaries, mainly in the U.S. and Europe.

CAE gets the remaining 5% of its revenue from medical-simulation products, such as mannequins for training nurses and medical students.

The company’s order backlog is now $5.4 billion, or roughly 2.4 years’ worth of revenue. That cuts its risk.

CAE has increased its dividend each year since 2008. The current annual rate of $0.30 a share yields 2.0%.

CAE is our #1 buy for 2015.