It’s essential to have a long-term horizon while investing in the equity markets. In fact, Warren Buffett has held blue-chip stocks such as Coca-Cola for multiple decades, allowing the Oracle of Omaha to benefit from the power of compounding.
You need to identify companies with strong fundamentals and widening cash flows, enabling you to derive outsized gains over time. Here are two of the best Canadian stocks I plan to hold forever.
Brookfield Asset Management stock
Among the largest and fastest-growing alternative asset managers in the world, Brookfield Asset Management (TSX:BAM) has a history of owning and operating cash-generating assets and businesses.
With a presence in more than 30 countries, BAM stock is valued at $23 billion by market cap. It invests in high-quality assets part of verticals such as renewable energy, infrastructure, real estate, and private equity.
The Brookfield ecosystem allows the company to identify themes or megatrends and consistently source attractive investment opportunities. Further, investors are choosing to invest their growing capital base in alternative assets, allowing BAM to expand its assets under management at a robust pace in the upcoming decade.
BAM emphasizes that alternate assets allow investors to benefit from excess returns, diversification, and predictable cash flows. It also estimates the AUM in alternate assets to surge to US$23.3 trillion by 2026, up from US$13.3 trillion in 2021. Moreover, institutional allocation toward alternative assets is forecast to rise to 60% in 2030, up from 5% in 2000 and 30% in 2021.
As investors have been consolidating their exposure to the largest and most diversified fund managers, BAM is well positioned to take advantage of these secular growth trends.
According to Brookfield Asset Management, its assets are the epicentre of decades-long megatrends such as decarbonization and digitalization, making it one of the top investment options right now.
BAM has increased its fee-bearing capital from US$129 billion in 2018 to US$440 billion in the third quarter (Q3) of 2023. It expects to end 2028 with a fee-bearing capital of more than US$1 trillion, while fee-related earnings are forecast to grow from US$900 million in 2018 to US$4.8 billion in 2028, indicating annual growth rates of 19%.
BAM stock also offers shareholders an annual dividend of $1.83 per share, indicating a yield of 5.2%. These payouts should move higher, as the company’s fee-bearing capital and cash flows continue to expand.
Royal Bank of Canada stock
The largest stock on the TSX in terms of market cap, Royal Bank of Canada (TSX:RY), offers a dividend yield of 4.44%. Due to its conservative lending approach, RBC has maintained dividends across market cycles, showcasing the resiliency of its cash flows.
RBC trades 17% below all-time highs as investors are worried about the company’s narrowing profit margins amid elevated inflation rates and higher provisions for credit losses.
But the drawdown has meant RBC stock trades at 11 times forward earnings, which is quite cheap given its profit margins should improve in the next 12 months.
RBC stock has delivered dividend-adjusted returns of 166% in the past decade, easily outpacing the TSX index returns of 115.3% in this period.
