You often hear success stories about someone who bought shares of Apple or Amazon 20 years back now sitting on a million-dollar portfolio. Many analysts and even mutual funds disclose the performance of only their performing stocks and write off failures. Only the stories of the outliers are told.
Whereas in reality it is impossible to know which will be the next Apple or Amazon. Even Warren Buffett has admitted to making expensive investment mistakes and losing money. In fact, there are more failure stories than success stories.
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The role of safe Canadian stocks in portfolio construction
Staying invested in a failing stock by taking lessons from outliers will only pull down your portfolio returns. There is a trade-off between safety and returns. The assured safe stocks worth holding for decades may not make you millionaires, as growth sprouts from the seeds of volatility.
The crux of it is that, when constructing a portfolio, build a base of safe stocks whose purpose is to keep your portfolio sturdy in volatility. The stronger your foundation, the more bandwidth you will have to build a satellite portfolio of risky stocks with the potential to generate alpha returns.
Two Canadian stocks that are safest to hold forever
Among many famous Warren Buffett quotes is “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
Investing in good companies during their good times is a formula for safe returns. Every stock you own should have a reason and purpose. Right now, these companies are enjoying good times as their business model is yielding desired results.
Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) is a stock to own for its dividends and oil price volatility. The company’s moat is its low-maintenance, high-output oil sands reserves and technical improvements that reduce production costs. The company has kept its fixed overhead limited to remain profitable even at times of oversupply.
Right now, the stock is trading at its all-time high as geopolitical tensions escalate and drive up oil prices. Higher oil prices help it earn a surplus from its production. Canadian Natural Resources leveraged this opportunity by acquiring several new reserves, increasing production, and using the high oil prices to accelerate debt repayment. It is just $1.5 billion away from hitting its long-term target of $13 billion net debt.
The dividend growth component makes it the safest stock because Canadian Natural Resources includes dividends and maintenance costs in its breakeven price of mid-$40s. In a downturn, the company generates value through share buybacks and debt repayments.
I would suggest holding the stock till the company’s debt is manageable and cash flows are positive. If you are considering buying the stock, wait for the WTI crude price to fall below US$70/barrel. That way, you can lock in a higher yield than 3.5% at the time of writing the article.
CT REIT
CT REIT (TSX: CRT.UN) is also having good times, enjoying regular rental income from its retail properties leased mostly to parent Canadian Tire. I consider it safe because of the arrangement that gives CT REIT the first right to say no to acquisition, development, or enhancement of a Canadian Tire store. Depending on how much work CT REIT can take, it develops and enhances projects while maintaining capital discipline.
Since the arrangement eliminates brokerage and advertising costs, CT REIT has cost efficiency over other REITs. The same property net income increases by 1.5% annually and through intensification. The overall free cash flow increases as it adds new stores to its leasable areas. This discipline of step-by-step expansion makes CT REIT a safe stock to hold forever.
The good times could end if the REIT makes the mistake of accelerated expansion using debt capital or encounters troubles with parent Canadian Tire. Right now, the REIT is enjoying the good times, and you can buy and hold its units and even compound your returns from its growing dividend, dividend reinvestment plan (DRIP), and the 3% discount on DRIP units.
