The 1 Sector To Buy And Hold Forever

Michael Vodicka's picture

Friday, October 20, 2017 - 2:30pm

by Michael Vodicka

Warren Buffett is the most successful investor of all time. His net worth of $81 billion makes him one of the richest people in the world. As is well known, the secret to his success is long-term, "buy and hold" investing.

Buffett says that when he invests in a stock his goal is to own it "forever." Investors looking to succeed in the stock market would be smart to follow his lead.

However, in 2017, stocks worth holding forever seem impossible to find.

That's because the economy is evolving faster than ever. According to a recent study from financial services firm Credit Suisse, the lifespan of S&P 500 companies has been falling for the last 70 years.

Back in 1950, the average age of an S&P 500 company was 60 years. In 1965, it had fallen to 33 years. By 1990, it was just 20.

According to market-research firm Innosight, around 50% of the S&P 500 will be replaced in the next 10 years. This high turnover rate in the market makes it more difficult than ever for investors to invest like Buffett.

But I've got a solution: Utilities are the perfect "forever stocks."

At first glance, most investors don't get pumped about owning utility stocks. They lack the flashiness of growth stocks such as Amazon (Nasdaq: AMZN) and Apple (Nasdaq: AAPL).

However, there are two reasons why utilities are the perfect stocks to own forever.

Utilities Benefit From A Legal Monopoly

Utilities have a longer lifespan than the average S&P 500 company because they are protected by legal monopolies. A legal monopoly happens when a company is granted an exclusive license to provide a good or service within a specific region.

Operating as legal monopolies helps protect utility companies from new competition. That shows up in the longevity in some of the largest utilities in the United States.

For example, Consolidated Edison, one of the largest electric utilities in the country that services millions of people in New York City, was founded in 1823 and has been paying a dividend since 1885.

This is the model for a forever stock.

Utilities Pay Some Of The Best Dividends In The S&P 500

The second factor that makes utilities great forever stocks is dividends, the secret sauce of utility stocks. 

Studies have shown that the secret to beating the S&P 500 isn't an outsized allocation to growth stocks. Contrary to popular belief, the secret to outsized gains lies in dividends.

The respected market-research firm Ned Davis conducted a study over more than four decades in which they analyzed the total returns of dividend and growth stocks. Their research found that dividend-paying stocks tend to beat the market over the long term and lead to far better returns than stocks that don't pay dividends.

The Ned Davis study showed that stocks in the S&P 500 that didn't pay dividends delivered a 2.5% annual return from 1972 through 2015. That would have turned a $1,000 investment into $2,910 over that timeframe. By comparison, dividend-paying stocks in the S&P 500 returned 9% annually over the same period -- also beating the S&P 500's 7.4% annual return. In this scenario, a 9% annual return over this period would have turned a $1,000 investment into $43,850.

If you're looking for a great forever sector, take a look at utilities. Here are three of the best utilities sector ETFs that offer broad exposure to the industry.

The Top 3 U.S. Utility ETFs
Name Ticker Dividend Yield
SPDR Utilities XLU 3.2%
Vanguard Utilities VPU 3.2%
iShares Utilities IDU 3.0%

 

From the group above, I have chosen to write about Utility Select Sector SPDR ETF because of its high dividend yield, great liquidity, and low expense ratio.

Utility Select Sector SPDR ETF (NYSE: XLU) is the most popular U.S. utility ETF. Its assets under management of $7.4 billion rank it first in its category.

This fund is a great way to gain diversified exposure to the domestic utilities. It holds 28 stocks all across the sector. There are a few reasons this fund stands out from the competition.

Its dividend yield of 3.2% ranks #1 in its category and is a 60% premium to the S&P 500's average 2.0% yield. This fund also offers one of the lowest expense ratios in its category. Its expense ratio of .014% is a 70% discount to the category average of .051%.

XLU is having a good year. Shares are up almost 12% for a total return of 14%. Take a look below.

Risks To Consider: Even the utility sector is evolving quickly in today's fast-moving economy. In order to be successful, utility companies will need to adapt to new sources of energy and new regulations. 

Action To Take: Investors who want to mimic Buffett's strategy forever should look at the utility sector. Utilities are protected by legal monopolies and pay some of the best dividends in the S&P 500. Buy any of the funds in my chart, start collecting dividend payments, and hold for the long haul.

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Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.