Hundreds of thousands of people search for terms like “stocks to buy today” or “best stocks to buy” or “top stocks for 2023” every single month.
The appeal is understandable, but most of the articles that pop up are ones quickly written by freelancers that often don’t even invest in the stocks they pitch. They’re just writing for one-time clicks and pageviews rather than doing serious research to provide value and establish long-term relationships with their readers.
The truth is, investing is hard, and building a portfolio of top stocks to buy that beat the market is something that even financial professionals have trouble doing consistently.
In fact, after fees, only about 11% of actively-managed funds outperform the S&P 500 over a significant period of time:
Chart Source: S&P 500 SPIVA
For the average non-professional investor, it’s even worse. As calculated by Dalbar Inc, and charted here by JP Morgan, the average investor underperforms a 60/40 equity/bond portfolio:
Chart Source: JP Morgan Guide to the Markets
That’s mainly because investors tend to buy stocks or funds during market tops when they are expensive and all the news is good, and then sell stocks and funds after they crash, when they are cheap. They keep doing that over years and the returns end up being below a buy-and-hold baseline.
Meanwhile, value investors like Warren Buffett are building up cash during euphoric bull markets, because everything is expensive and very few stocks meet their strict investment criteria. Then when a stock market crash eventually occurs and top stocks are on sale everywhere, they deploy their cash hoard and snatch up the bargains of a decade.
However, there are plenty of independent, disciplined investors that build serious wealth in the market over the long term by following similar methods. It’s simple, but not easy, to stay focused and buy high-quality companies at reasonable prices on a consistent basis.
Investment Criteria for Top Stocks
Even though markets are hard to outperform, I think individual stocks can be a valuable component of an investor’s portfolio.
As I explained in my article about investor psychology, the most important thing you can do is find the right investment strategy for your unique needs and personality. You need a strategy that performs well, but also one that you’re comfortable with and that will entice you to invest regularly.
For many people, that’s index funds. In fact, I think most people should hold some index funds.
But I think dividend growth investing is a good strategy for many hands-on people as well. This means investing in companies with 10+ years of consecutive dividend growth, sustainable dividend payout ratios, and solid growth prospects.
As a strategy, it provides more reliable investment income than index funds, gives investors an opportunity to learn about a variety of businesses, and turns on the “collector’s instinct” in a lot of people that can get them excited to invest more money.
While index funds can seem distant and vague, buying and holding a collection of hand-picked dividend stocks that grow their dividends every year at an exponential pace just “clicks” for a lot of people, and builds good investing habits. Dividend growth stocks as a group have statistically mildly outperformed the S&P 500 for decades too, which doesn’t hurt.
You can buy shares of companies, those shares produce cash dividends that grow each year, and you can reinvest those dividends into more shares or you can spend them.
Rather than just hoping the stock price moves up rather than down, dividend investors tend to pay attention to the underlying fundamentals of the company, including the growth and safety of their dividends, and watch for strong long-term performance. This helps build good investment fundamentals because they focus on company performance more-so than fluctuations in the daily stock price.
With that said, here are the 8 main criteria I used when selecting top stocks to highlight for this article:
Criteria 1: The company benefits from long-term trends and has little foreseeable risk of obsolescence.
Criteria 2: The company has above-average returns on invested capital and a durable economic moat to keep it that way.
Criteria 3: The company has a strong balance sheet, and solid historical performance during recessions.
Criteria 4: The company is a premium provider. They compete over quality, rather than just on price.
Criteria 5: The company generally has management with long tenures and a focus on long-term results.
Criteria 6: The company enjoys profitable growth. Not growth at all costs, but a combination of sustainable growth and value.
Criteria 7: The company is trading for a reasonable valuation. It’s a fair price for an exceptional company.
Criteria 8: The company is in my personal portfolio. I’ve researched and followed it for years, and understand its various nuances.
I didn’t directly include a dividend metric for this article, because I already have two popular dividend articles that I keep fresh with stock ideas:
Therefore, some of the companies in this article have rather low dividend yields, and that’s okay. The focus here is on total risk-adjusted returns.
When it comes to investing, nothing is for certain. There are no perfect stocks to buy, because there’s no way to see the future perfectly.
However, buying a diversified portfolio of high-quality companies at reasonable prices is among the most reliable ways to build wealth over the long-term.
7 Great Stocks To Buy and Hold
Here are seven companies that I think are trading at reasonable valuations that offer strong risk-adjusted returns over the next decade, and meet the above-mentioned criteria.
All of these are companies I actually own for the long-term. They’re ones I’ve researched for years, and some of which I have quite large positions in.
Some of these are likely to beat the market over time, while some may not. They have all beaten the market in the past. In terms of risk-adjusted returns, these are among the stocks I’m most comfortable holding through all market conditions along with my index funds. Always do your own due diligence before buying any company.
I published the first version of this article in 2018, and all 7 stocks that were selected outperformed the S&P 500 over the subsequent year. I then updated this article in subsequent years, and as of this writing have updated it at the start of 2023.
#1) Brookfield Corporation (BN)
Brookfield Corporation (BN) is a Canadian financial firm you might or might not have heard of. It’s an asset manager that specializes in real assets like property, infrastructure, and renewable energy.
Their roots trace back over a century, when the company was an early developer and operator of infrastructure in Brazil.
Over the past 20 years, they have expanded into a global asset manager with over $700 billion in assets under management. They have diverse properties including gas pipelines, toll roads, data centers, solar farms, hydroelectric dams, and skyscrapers across five continents.
They hold the controlling stake in five publicly traded entities:
- Brookfield Asset Management (BAM)
- Brookfield Renewable Partners (BEP)
- Brookfield Infrastructure Partners (BIP)
- Brookfield Business Partners (BBU)
- Brookfield Reinsurance (BNRE)
As a private equity firm, they make money in three main ways. First, they invest their own capital into a variety of real assets. Second, they collect money from institutional investors, invest that money on behalf of them into a variety of real assets, and collect management and performance fees from that capital. Third, they founded and hold large stakes in the above-mentioned publicly traded partnerships, from which they collect cash distributions, management fees, and performance fees.
This structure gives them strong growth, because in addition to their direct investments being extremely profitable, they are also benefiting from a major trend of increased institutional allocations into alternative assets, like private equity, real estate, infrastructure, and other high-performing low-liquidity investments. Brookfield’s private funds have consistently beaten benchmarks like the S&P 500.
Insiders own a large portion of the company, worth billions of dollars. So, their incentives are highly aligned with shareholders. The CEO, Bruce Flatt, has been with the company for over three decades, has been CEO for over half that time, and has overseen tremendous performance during his tenure so far.
Despite Brookfield’s astounding results, they are not well-known and in my opinion they are still reasonably priced. Since they own cash-producing stakes in multiple partnerships and have a complex corporate structure, BN tends not to show up well on stock screeners, and people looking at their financial statements for the first time wouldn’t see anything that stands out. In fact, they always look overvalued at first glance because their reported earnings tend to be choppy.
So, they tend to fly under the radar compared to a lot of top stocks that are household names.
The company positions itself well for recessions, because management builds up a fortress balance sheet, and then buys great assets for bargain prices from distressed sellers.
Often, companies take on too much debt, their credit ratings drop, their interest yields get too high, and then when something unexpected hurts them, they go bankrupt or need to sell assets at fire-sale prices. Brookfield buys them, refinances them to much lower interest rates thanks to their high credit rating, and makes strong returns as they hold and expand those assets. Often, they sell those assets during bull markets for much higher valuation multiples than they paid, so that they can recycle that capital back into other distressed assets.
For example, during the 2007/2008 financial crisis, Brookfield bought a variety of undervalued shipping ports, rail infrastructure, and other global assets from a firm called Babcock & Brown that ran into too much debt and got liquidated. These assets performed tremendously as the global economy recovered.
Back when Chile was a frontier market without much investor interest, Brookfield bought cheap electrical transmission assets, expanded them for over a decade, and sold them over a decade later for a 16% annually compounded return.
When Brazil ran into a huge recession during 2014-2017, Brookfield acquired all sorts of gas pipelines and toll roads from distressed sellers that needed to raise capital, and locked in long-term favorable pricing contracts indexed to inflation.
When North American midstream companies ran into major trouble in 2015-2018 due to energy oversupply and low prices, Brookfield bought energy transportation infrastructure on the cheap.
After solar developer SunEdison collapsed into bankruptcy from too much debt to fuel overly-aggressive growth plans, Brookfield swooped in and bought lots of attractively-priced solar and wind farms from them.
In early 2018 when the retail sector was under intense pressure from the existential threat of online retail, Brookfield bought out General Growth Properties, which has a lot of best-in-class properties and high occupancy rates. Some of this they will retain as retail, while other assets they will redevelop into other types of property.
In 2020, BN’s office towers were pressured by COVID-19, but their renewable energy and infrastructure businesses performed very well, and they have been continuing to add bolt-on acquisitions to their various platforms.
The point is, Brookfield management consists of contrarian investors. They buy undervalued (but premium quality) assets during times of stress, expand them, and sell them for much higher valuations during bull markets.
Although Brookfield Asset Management only pays a 1.8% dividend yield, most of the returns come from capital appreciation over time. Their various partnerships, on the other hand, offer higher yields with a bit less growth.
BN Economic Moat Rating: 5 out of 5
Brookfield (BN) has a globally diversified portfolio of real assets, including utilities, utility-like regulated monopoly infrastructure, premium buildings in world-class cities like London and Manhattan, and a large collection of hydroelectric dams. These are among the types of assets with the widest available economic moats. Being so globally diversified also reduces their reliance on any one nation’s economy or politics.
In addition, asset managers benefit from high switching costs, and Brookfield Asset Management (BAM) in particular does. Private equity funds typically lock in investors for many years. And as long as BAM private funds continue to perform well, institutional investors should continue to reinvest in them when they have the opportunity to do so. BN is the majority shareholder in BAM.
BN Balance Sheet Rating: 4 out of 5
Brookfield (BN) has plenty of liquidity, and much of its debt is non-recourse to the parent corporation, but due to its complex corporate structure with multiple layers of moderate leverage, it has a moderate investment-grade credit rating from most rating agencies.
#2) Enterprise Products Partners (EPD)
Enterprise Products Partners LP (EPD) is one of the largest midstream companies in North America.
They operate a vast pipeline network that transports oil, gas, refined products, and petrochemicals. They play a key role in the growing US liquified natural gas market,
Although not without occasional incidents, pipelines are safer and more cost-effective for transporting various liquids and gases than their main alternative, which is by freight train.
Enterprise has little direct exposure to commodity prices; they make money mainly by transporting energy, refined products, and petrochemicals. However, prolonged periods of low energy prices can reduce production volumes, which eventually means lower volumes and lower revenue for transporters like Enterprise.
One of the things I like best about Enterprise is how diversified they are. Rather than being merely an oil and gas play, their exposure to refined products and petrochemicals gives them strong future-proof growth, and resilience against changes in market conditions.
Source: EPD Q4 2022 Presentation
Enterprise currently has an 8% dividend yield and 24 years of consecutive annual dividend growth:
Chart Source: F.A.S.T Graphs
With a high dividend yield, a dividend payout ratio that is well-supported by distributable cash flows, and solid dividend growth expected going forward, Enterprise offers a high likelihood of strong total returns for the next decade.
EPD Economic Moat Rating: 5 out of 5
Pipelines and related energy infrastructure has a rather wide economic moat. Once a pipeline is built to supply a certain area, it’s generally uneconomic for a competitor to build a similar pipeline. New pipelines generally are built when the needs of a region are structurally undersupplied, and at that point, it’s often economic for the same company to expand their existing volume on the same footprint with a secondary pipeline, rather than for a competitor to copy it.
Political opposition can prevent the construction of certain pipelines. This slows down growth of some northern pipeline companies, but also ironically increases the importance of existing pipeline infrastructure.
EPD Balance Sheet Rating: 4 out of 5
Enbridge has constantly maintained one of the highest credit ratings and lowest debt ratios in the midstream industry, which is what allowed them to keep raising their distribution over the years rather than having to cut it during downturns. In other words, they invested like the tortoise, not the hare.
Still, any asset heavy business like this currently uses a lot of leverage. They have a long bond maturity profile and rather low interest rates on debt that is mostly fixed-rate.
#3) Truist Financial (TFC)
Truist Financial is one of the top ten banks in the United States in terms of size. They operate in a sweet spot where they are not one of the “Big Four” highly-regulated banks, but instead are in the next size tier of major regional banks.
They pay a rather high dividend yield, and are currently trading for below-average valuations:
Chart Source: F.A.S.T Graphs
The bank primarily serves the southeast portion of the United States, which collectively has among the best growth demographics in the country. In addition, the bank is highly diversified, with retail banking, small business banking, corporate banking, insurance, and wealth management.
Chart Source: Truist Q4 Presentation
Banks experienced slow growth in the 2010s decade, which consisted of private sector deleveraging, low interest rates, and disinflation. In the 2020s decade, I think we’ll likely see higher average inflation, higher average interest rates, and resumption in nominal loan growth. Banks like Truist can borrow money at interest rates that are well below the inflation rate, and lend it out for a decent spread.
TFC Economic Moat Rating: 4 out of 5
As a regional bank, Truist has branches in a significant number of states and is not too heavily exposed to any one state.
The top ten list of banks doesn’t change much from year-to-year; these institutions tend to be sticky wide-moat businesses with high switching costs and established customer relationships.
TFC Balance Sheet Rating: 4 out of 5
Banks are vulnerable to major recessions, and so I can’t realistically consider any bank to have a 5/5 balance sheet. They borrow cheap short-duration money (such as customer deposits) and lend more expensive and longer-duration loans (such as mortgages, credit cards, personal loans, and business loans), and perform various fee-generating services. They are vulnerable to major economic declines which can result in significant loan losses.
That being said, Truist is geographically diversified, has high capital ratios, and the overall US banking sector has a low ratio of loans to assets (unlike 2008 where they had a generationally high ratio of loans to assets).
#4) HDFC Bank (HDB)
HDFC Bank is the largest private bank in India. It is celebrating its 25th year since being founded in 1994, and now has over 5,000 branches and a robust online business throughout India.
India is set to overtake China as the world’s most populous country, and still has very low (but rising) per-capita GDP. As a large emerging market, it has one of the highest GDP growth rates in the world, and is set to become one of the world’s largest economies by the 2030s.
HDFC stock is available as an ADR on the NYSE under the ticker HDB. You can see below, with data since its inception on the public markets, how fast its earnings are growing relative to a large U.S. bank like J.P. Morgan Chase:
Chart Source: Y Charts
Besides all of the normal risks that come from operating a bank, HDFC Bank’s stock has two key risks.
First of all, it is not cheap, with a blended P/E ratio of over 24 at the moment. However, with earnings growing at over 15% per year, it actually has a rather attractive PEG ratio, which was a metric popularized by Peter Lynch that compares the valuation of a company to its growth rate.
Second, India is very reliant on oil imports, and whenever oil becomes expensive, their trade deficit widens, which tends to hurt the currency. If you’re an American or European investor, for example, then you don’t really care how HDFC Bank stock performs in terms of Indian rupees; you care how it performs in dollars and euros. If the rupee weakens vs those currencies, your returns could be reduced. On the other hand, if the rupee strengthens vs your home currency, it’s a tailwind.
Personally, I think having a stake in India as part of a diversified portfolio, and letting it run for the next decade, is a smart thing to do. I like the INDA ETF, but I also like HDFC Bank stock, particularly.
HDB Economic Moat Rating: 4 out of 5
HDFC Bank has built up significant economy of scale within India, which gives it operational advantages over competitors. In addition, banks tend to have annoying switching costs, meaning that once customers pick a bank, they don’t change too frequently.
HDB Balance Sheet Rating: 4 out of 5
HDFC Bank maintains strong creditworthiness, but as a bank in a developing country, it can be subject to more severe currency fluctuations or other crises compared to what is historically normal for developed markets.
#5) Canadian Natural Resources (CNQ)
The world tends to undergo cycles of major investment between financial assets and real assets.
During periods of scarcity for things like commodities and infrastructure, inflation runs hot, and the world begins building mines and various infrastructure projects, up until it leads to a period of oversupply.
That oversupplied environment leads to disinflation and lower interest rates, which is good for promoting higher asset prices. Investors can buy income streams and lever them up with cheap debt, and can use equity as compensation for unprofitable high-growth companies. Eventually, this environment runs its course, as asset prices become excessive, and the period of real-world oversupply ends.
The 1940s were about real assets, while the 1950s and 1960s were more about financialization. The 1970s were once again about real assets, while the 1980s and 1990s were more about financialization. The 2000s were once again about real assets, while the 2010s and early 2020s were more about financialization. If the world collectively enters another period of emphasizing real assets, then energy producers are a key industry to have exposure to.
US shale oil producers tend to have rapid decline rates. In other words, they drill a well, and within a few years that well is mostly dry. They have to keep drilling more and more wells just to maintain current production, let alone grow it.
On the other hand, deep water wells and oil sands tend to have the opposite dynamic. Their upfront development costs are much higher, but from there the have a very long period of production with a low decline rate.
Canadian Natural Resources focuses primarily on the latter, especially with their oil sands. The company has very long-life reserves and major free cash flow generation potential due to a lot of upfront capital expenditures already having been performed.
Chart Source: F.A.S.T. Graphs
Canadian Natural Resources Economic Moat Rating: 4 out of 5
Canadian Natural Resources’ moat is limited by the fact that just like any commodity producer, it can’t control the price of its products (oil and gas).
That being said, the have among the longest reserves relative to their annual production rate, and therefore have a long runway of profits ahead.
Canadian Natural Resources Balance Sheet Rating: 4 out of 5
With a BBB- credit rating, Canadian Natural Resources probably has the weakest balance sheet on this list, officially.
However, it’s headed in the right direction. They significantly reduced their net debt over the past couple years, to the point where one year’s worth of net income is higher than their total net debt. Whether income can remain this high will largely depend on energy prices, but the company has taken the prudent action of funneling large percentages of their incoming cash flows towards strengthening the balance sheet.
#6) CVS Health (CVS)
CVS Health (CVS) is one of the largest companies in the world ranked by revenue. They operate a large retail pharmacy chain, a health insurance provider, and a pharmacy benefits manager.
The stock became rather overvalued in 2014 and has since declined quite a bit, while their earnings per share kept increasing. In recent years, the company performed a handful of transformative acquisitions to position themselves as a leading multi-vertical healthcare provider.
Chart Source: F.A.S.T. Graphs
CVS Economic Moat Rating: 4 out of 5
As a vertically-integrated healthcare company, combining a retail pharmacy chain, health insurance provider, and pharmacy benefits manager, CVS has cemented itself pretty well into the US healthcare landscape. They do face an issue of rather low switching costs between pharmacies, but their other businesses create longer-term relationships with clients.
CVS Balance Sheet Rating: 4 out of 5
CVS has a BBB credit rating, which is rather average. However, their balance sheet strength is sharply moving in the right direction, ever since their Aetna acquisition. The purple line in this chart shows their net debt level, and how fast it has been declining in recent years:
#7) Intercontinental Exchange (ICE)
Intercontinental Exchange (ICE) owns a number of exchanges and clearing houses around the world, with the New York Stock Exchange being the most venerable among them.
That’s right, you can buy shares of the New York Stock Exchange… on the New York Stock Exchange. However, they also handle major trading volume for commodity futures and over-the-counter markets.
What makes an exchange attractive is that they have relatively fixed costs, while their revenues are quite variable and can grow in line with inflation and population. Especially after the recent sharp correction in ICE’s share price, I think it’s pretty interesting going into 2023.
Chart Source: F.A.S.T. Graphs
ICE Economic Moat Rating: 5 out of 5
Securities exchanges historically have enjoyed about the strongest economic moats that any company can have. Once one develops, that is where the trading liquidity is, and smaller exchanges are rather irrelevant in comparison because they lack liquidity. Liquidity then tends to consolidate towards the biggest, as a strong network effect. This is then further supported by regulatory guardrails.
The digital tokenization of existing securities represents a potential change in the type of tech rails that trading and settlement happens on, so ICE and others will need to be vigilant about modernizing their backend systems. Technology switchovers represent periods of time where existing moats can be lost, so that is a risk worth monitoring.
ICE Balance Sheet Rating: 4 out of 5
ICE has been a rather aggressive grower and acquirer, at times taking on significant debt to do so. A series of bad investments could derail the financial plans of the company. Overall, the company has a strong A- credit rating, and maintains a very reasonable ratio of net debt to annual free cash flow.
Asset Allocation vs Hot Stock Selection
Asset allocation, meaning the long-term strategy for how you invest in various asset classes, is more important for most investors than individual stock selection.
Focusing all your time on trying to pick the top stocks usually results in missing the forest by looking for the trees.
Getting the big questions right, like how much of your net worth should be in domestic equities, how much you should invest in international stocks, how much to invest in bonds or precious metals, how reliably you re-balance your portfolio, and how consistently you save money to invest, are likely to generate the bulk of your returns and portfolio growth compared to spending a lot of time looking for the top stocks to buy.
Everyone has that colleague at work that talks about how their portfolio did this quarter, or about some hot stock they recently bought. You know the type of guy. Ten years later he’s still talking about trading a couple thousand bucks in stocks around but is he rich yet?
It doesn’t matter what stocks you pick if you don’t a) diligently put capital to work month after month with a high savings rate and b) focus on long-term results and building wealth.
There are some highly-skilled traders out there that make a lot of money in the short term by devoting their full-time job to it, but most of the people who get rich from the stock market are people with day jobs that diligently save and invest money every paycheck.
They keep buying and holding dividend stocks, index funds, real estate, or other high quality assets with a focus on long-term results.
And as I said before, I’m in favor of buying individual stocks, at least for some people. I think it’s a valuable practice to be able to understand and value a business, and evidence shows that some value-oriented strategies with a long-term focus do indeed outperform the broader market.
But it’s important not to get obsessed with it, or concentrate too heavily in any individual hot stock.
My purpose for writing this article is to point out the problems with short-term thinking and hunting for hot stock tips, while also indeed giving some real ideas for stocks to buy.
If you approach investing with a disciplined savings rate, proper investment criteria, and reasonable expectations, you can do well.
Some stocks to buy on the list are high-valued fast-growing companies, while others are under-valued moderate-growth value stocks. But these are all real cash-producing companies with market-beating historical returns, superior returns on invested capital, and wide economic moats, that don’t rely on much speculation for good returns going forward.
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