There are two types of FTSE 100 companies in particular whose stocks I am happy to buy and hold for decades. First, I like the look of a dividend hero stock. Reinvesting dividends to build up the number of shares I own, which can eventually start paying me a passive income, forms a key part of my retirement planning. Second, I would be happy buying and holding a FTSE 100-listed company that invests in a portfolio of exciting high-growth stocks for decades. A portfolio of stocks can change over time and is unlikely to fail because of one bad bet. Because of this, I can be confident the company will still be around for years to come.
A passive income stock
Stocks that pay reliable dividends are prime candidates to buy and hold for decades. A steady flow of dividends can be used to buy more shares. When its time to retire, there should be a stream of passive income to enjoy, or the shares can be sold. For this plan to work, I look to buy dividend hero stocks.
Consumer goods giant Unilever (LSE: ULVR) has not cut its dividend in nearly four decades. Unilever has historically made a little over 1.5 times as much in earnings as it pays out in dividends. Being able to cover dividends with earnings comfortably is a hallmark of a dividend hero stock, and forecasts for the next couple of years suggests the Unilever will continue to be a dividend hero.
Unilever has recently won shareholder approval to simplify its corporate structure. This should make acquisitions easier, which is good because Unilever historically achieves a high rate of return on invested capital. Margins have been improving, and the company’s e-commerce strategy paid off handsomely as countries went into lockdown. I am happy buying Unilever and holding it for decades. The dividend yield is around 3% now but given Unilver’s history and ambitions, I except sustainable dividend growth from this FTSE 100 stock.
FTSE 100 growth
I have often lamented the lack of FTSE 100 stocks among the headline-making high-growth tech companies. However, Scottish Mortgage Investment Trust (LSE: SMT) provides the kind of exposure I have been craving. The name of this FTSE 100 stock is somewhat misleading. What the mangers at Scottish Mortgage do is invest in a portfolio of around 90 stocks that they feel have competitive advantages in the new economy.
Large and listed companies like Amazon (e-commerce), Tesla (electric vehicles), and ASML (computer chips) feature in Scottish Mortgage’s top 10 holdings. Investing in a high-growth portfolio has done wonders for Scottish Mortgage’s share price. Over the last five years, it has risen by an average of 30% per year, comfortably beating the FTSE 100. That kind of return would have transformed a £1,000 investment into over £4,000.
Scottish Mortgage takes a long-term approach to its stock picks. Some are in smaller and unlisted companies that may take years to pay-off. Some will, of course, fail. Right now, some tech stocks look pricey and could fall. All this points to a lot of potential volatility in Scottish Mortage’s stock price. But that’s fine with me, as I am happy to buy these shares, hold them for decades, and ignore any short-term price swings.
James J. McCombie owns shares of Scottish Mortgage Inv Trust and Unilever. The Motley Fool UK has recommended Unilever. 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.