There are several paths to financial freedom. The most usual ones include starting a highly successful business, having a highly rewarding career, receiving a huge inheritance, picking the right stocks just before they shoot to the moon, or being as smart as legendary investor Warren Buffett. Not all of us can be as gifted, gritty, and lucky” as some of today’s billionaires. However, a smart investment strategy executed over a long period of time can produce decent returns that may allow anyone to level up, secure a decent retirement nest egg, and be happy and comfortable.
The smart investment strategy proven over time involves buying and holding stocks of well-run businesses with track records of generating profits and positive cash flows. The businesses should ideally pay dividends so one can receive some cash flows that enhance portfolio liquidity and provide growing dry powder to finance the next best investment idea, help pay bills, or simply be reinvested to grow wealth.
Let’s have a look at two smart TSX stocks that could fit well into a long-term, buy-and-hold investment strategy for maximum total returns, for many years to come.
They are run by smart-money managers with proven track records.
Buy Exchange Income Corporation stock for steady growth
A $10,000 investment in Exchange Income Corp (TSX:EIF) just 10 years ago could have grown three-fold to $36,000 today. The $2.2 billion company is a smorgasbord of well-run diversified businesses serving the aviation, aerospace, and manufacturing niches of the North American economy.
Exchange Income has grown steadily over the years through smart acquisitions. Its growth rate gathered pace in 2022 as the company reported 46% year-over-year growth in revenue to $2.1 billion, a 55% surge in adjusted net earnings, and a 20% increase in free cash flow.
The company basically acquires proven companies with excellent management teams in defensible niche markets and nurtures them to maturity. It has maintained a healthy balance sheet that allows it to sustainably execute acquisition deals as opportunities come. This strategy has worked spectacularly in the past. The smart stock remains well-resourced to finance its growth strategy over several years to come.
Exchange Income stock pays a monthly dividend that yields 4.9% annually. The dividend is well covered. The company paid out 73% of net earnings and 55% of free cash flow in 2022.
Strong growth ahead
Following 38% growth in adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) in 2022, management guides for a further 12% to 18% growth in adjusted EBITDA in 2023.
While providing the above growth guidance, CEO Mike Pyle said that “the tactics, plans, strategies, and investments required to deliver these results were already in place” and all that was left was for his management team to “execute on them, as they consistently have for 18 years.”
Now, 18 years is a fairly long time, and EIF stock generated 1,590% in total returns during the period. The law of large numbers may drag performance going forward. However, investors still have a chance to book decent gains on the stock for years to come.
Buy and hold Alaris Equity Partners stock for long-term gains
Alaris Equity Partners Income Trust (TSX:AD.UN) provides the necessary capital to proven-profitable, cash-flow-rich businesses with wide moats and tried-and-tested management teams. Its investment strategy has proven successful. The company reported a near-30% year-over-year surge in revenue and 2% growth in operating cash flows during the past year.
The smart TSX stock predominantly invests in preferred equity of cash-generating businesses and receives dividends that rank higher than common share dividends from its portfolio companies. It pays a well-covered quarterly dividend that yields a staggering 7.6% per annum. Investors who lock in Alaris Equity Partners’ high-yield dividend today will require under 2.4% capital gains on trust units to achieve a 10% total return, boosting the odds of doubling their money in just seven years (using the Rule of 72).
The trust’s income distributions remained well covered in 2022 given a cash flow payout rate under 40% last year. Dividends may keep flowing for many more years to come.
Alaris Equity Partners stock has generated a smart 161% in capital gains over the past three years.