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2 income stocks I’d buy and hold forever

If you’re searching for stocks to own forever, you face several tough requirements. The first is that business you hope to invest in will need good longevity.

A second requirement, in my view, is that the firm must pay a reliable dividend. It’s worth noting that while Warren Buffett’s firm Berkshire Hathaway famously doesn’t pay a dividend, most of the firm’s successful investments do pay regular dividends.

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One top choice

I believe one obvious choice for long term investors is the property market. My preference is for commercial property companies with large portfolios of income-generating assets.

Not all property stocks are of equal quality. But one company I would be happy to buy and own forever is Derwent London (LSE: DLN). This firm has been trading since 1984 and specialises in central London property, mainly offices and retail space.

The firm’s portfolio was valued at £5bn at the end of 2016, giving the stock a book value per share of 3,551p. At today’s share price of 2,869p, this means Derwent shares trade at an attractive 19% discount to their book value.

The other attraction for me is Derwent’s dividend. The stock’s forecast yield of 2.1% may not be the highest on offer, but Derwent’s dividend continued to rise during the financial crisis. The company’s payout has risen from 6.7p per share in 1998 to 52.4p today.

What could go wrong?

The biggest risk for property investors is that a fall in the value of their properties will coincide with a fall in demand from tenants. Heavily-indebted firms can be left struggling to meet interest payments and be forced to raise cash from shareholders.

However, I believe Derwent’s focus on central London and its low loan-to-value ratio of 16.5% means this is unlikely to happen. Historically, London has always bounced back fast from recessions.

Would I buy today?

High London property prices mean that Derwent shares aren’t especially cheap at the moment. But I’d be happy to buy at current levels, with a view to topping up during future downturns.

This business isn’t going away

Love it or loath it, packaging is a part of modern life. Although I’d hope that big retailers and industrial concerns will find ways of reducing waste, I can’t imagine packaging becoming any less important than it is today.

There are a number of listed packaging firms on the London Stock Exchange, but the one I’m going to focus on is FTSE 100 member Smurfit Kappa Group (LSE: SKG). This Dublin-based group is run by CEO Tony Smurfit, who has a £25m stake in the firm.

The firm’s stock looks quite attractive to me. Smurfit Kappa’s operating margin has risen steadily in recent years, from 8.1% in 2011 to 10% in 2016. The stock doesn’t look expensive either, on about 12 times 2017 forecast earnings and with a prospective yield of 3.3%.

My only reservation is that the group’s net debt to EBITDA earnings ratio looks a little high, at 2.4x. As a general rule, I prefer to see companies operate with net debt of less than two times EBITDA.

Notwithstanding this risk, I think Smurfit Kappa has the potential to be a buy and hold stock and would be happy to start building a position at current levels.

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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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