It sounds counterintuitive, but the best returns often come from so-called “boring” investments. While many investors chase high-growth stocks in emerging and unproven industries, it is often the well-established companies in mature markets that deliver the best long-term gains. They do so without putting shareholders through excessive volatility, too.
That’s been the case in my own portfolio, which is tilted toward companies with excellent brand strength and a long track record for steady growth. Here’s why I’ve had a few of these “average” stocks in my portfolio for more than a decade.
Watching paint dry
I was early on in my investing career when I bought Sherwin-Williams (SHW -0.33%). I liked the paint giant for superficial factors like its large sales base and its growing dividend payment. I had no idea that Sherwin-Williams would succeed in boosting that revenue base through a mix of organic growth and big acquisitions, or that profitability would rise significantly. These factors helped the stock rise over 400% in the past decade, including dividend payments, to double the wider market’s rally.
Ultimately, I attribute my above-average returns here with patience, luck, and the power of reinvesting dividend payments. My initial investment in the stock in mid-2008 is up 1,600%, but the total returns are closer to 2,000% after including those dividends.
Supersize me
McDonald’s (MCD 0.02%) operates in an industry that’s known for low barriers to entry, tiny profit margins, and a high rate of turnover and bankruptcy. Yet this fast-food giant has been a positive force in my portfolio, delivering about 100 percentage points of excess returns over the S&P 500 in the past decade.
Many of the company’s competitive strengths are well known on Wall Street. It generates most of its earnings through franchise fees, which translates into higher profitability than is customary in the industry. The chain pays a steadily rising dividend as well.
But its the company’s openness to reinventing itself that really matters. The chain’s core menu hasn’t really changed in decades, but the business is always responding to shifting tastes and consumer preferences, most recently by building up a huge mobile ordering and delivery network.
These changes apply to the operations, too. A refranchising program this past decade helped boost profit margin to over 40% of sales. The stock could continue generating solid returns given that management is targeting a near 50% margin in the coming years.
Falling behind in the endurance race
Not every long-term holding will be a winner, and Nike (NKE 2.05%) fits squarely in that “underperformer” category for me. Shares haven’t kept pace with the wider market in the past decade and are underperforming since I first bought the stock in 2011.
Growth has been lackluster in recent years as the footwear and apparel giant struggled with the impact of big swings in demand and raw material prices. Nike hasn’t been as hurt by these moves as retailers such as Foot Locker have, yet most investors wouldn’t be thrilled with its sales and earnings performance in the past several years.
Nike is aiming for a rebound in 2024, supported by factors such as low inventory levels and a flood of innovative product releases. Investors might want to simply watch this stock, though, as Nike still hasn’t demonstrated it can sustainably boost annual earnings in a tough, and price-competitive, industry.
Demitri Kalogeropoulos has positions in McDonald’s, Nike, and Sherwin-Williams. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Foot Locker and Sherwin-Williams and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
