Special Free Report From The Motley Fool

The secret to building wealth has been hidden from you by just about every stockbroker… pundit on television… and advisor you’ve every trusted.

Financial advisers don’t want to tell you about it. They would much rather you put your retirement savings in high-fee financial products like mutual funds and annuities.

Stockbrokers hate this strategy because if everybody started using it, their lucrative source of commissions could dry up. Bankers would rather have you park your money in a chequing account or GICs that yield less than 1%.

Basically nobody in the financial industry wants to talk about this because the only person it benefits is you! Yet thousands of ordinary investors are using the strategy to build wealth in the stock market.

The secret your stockbroker doesn’t want you to know

Here it is: In our opinion, the very best way to build wealth in the stock market is to buy wonderful businesses, reinvest the dividends, and hold for the long haul.

I know. It’s common sense right? Yet in spite of the wisdom of buying and holding good, solid businesses, this strategy is rarely promoted by the financial industry.

Most brokers are compensated on commission. They are only paid when you buy or sell a stock.

Think about it. If your broker’s livelihood depends on you frequently buying and selling shares, is he really going to pitch you a company you never want to sell? I doubt it.

Yet this simple method is responsible for creating some of the largest fortunes in history. But don’t just take my word for it. Consider the story of Anne Scheiber.

Ms. Scheiber never earned a lavish salary. She lived in a tiny New York City apartment and wore the same coat year after year to save money.

In 1932, Ms. Scheiber was a 38-year-old IRS auditor. Intrigued by the stock market, she forked over most of her life savings to her brother, a young stockbroker on Wall Street, who promptly lost it.

Determined to try again, but this time relying on herself, Ms. Scheiber saved $5,000 and plunked it back into stocks again in 1944 (at the age of 50). She purchased shares of wonderful businesses such as PepsiCo, Schering-Plough, Chrysler, and Coca Cola, and reinvested her dividends.

By the time Ms. Scheiber passed away in 1995 (at the age of 101),her portfolio had grown to $22 million.

Grace Groner, a secretary at Abbott Laboratories, did almost the same thing. In 1935, she purchased three shares of her employer’s stock for about $60 per share.

Ms. Groner reinvested any dividends that were paid out to shareholders and never sold a share even after repeated stock splits. When she passed away in 2010, she owned more than 100,000 shares of Abbott stock, valued at about $7 million.

Of course, Ms. Scheiber and Ms. Groner are exceptional cases. But it’s stories like these that your broker doesn’t want you to hear.

The best method we have found to build wealth in the stock market is to buy wonderful businesses — companies that are so reliable that you can purchase them today and hold for the rest of your life.

When you own them, you no longer have to worry so much about inflation, recessions, or flash crashes. You can just sit back and let your capital and dividends compound over time.

Unfortunately, not every stock is a wonderful business. This is an exclusive list. In particular, remarkable companies tend to have one or more of the following traits:

  • Companies with a sustainable competitive advantage. When buying a business, ask yourself this: Can I imagine that this company will exist in 50, even 100 years from now? Forever stocks have some sort of competitive advantage that prevents new competitors from entering the industry. Low cost leadership. Patents. Brand names. These advantages allow the company to earn excess returns for shareholders year after year.
  • Managers with integrity. If you were running a business, would you consider hiring an employee without an interview? The same applies in investing. When you buy a stock, you are entrusting your capital to the managers at that company. Investors have to make sure that executives will run the business in an ethical, honest, and decent way.
  • Stocks with reliable dividends. There’s no better indication of a shareholder-oriented management team than a history of growing dividends. Forever stocks have a track record of paying reliable dividends to shareholders over decades and centuries.

All of these points are really just common sense — wonderful businesses that take care of their shareholders should do well over the long haul. It doesn’t take a PhD to figure that out. But actually shifting through the thousands of publicly traded stocks can be a challenge.

So to help you find these remarkable companies, I have hand-picked what I believe are three wonderful businesses that can be held forever. All three firms are built to withstand the test of time and have been paying dividends to their loyal shareholders for decades (or centuries in one case).

Is Fairfax Financial Holdings the next Berkshire Hathaway?

Company Snapshot: (data as of May 13, 2015)

  • Market cap: $13.96 billion
  • Recent share price: $626.05
  • Trailing P/E: 11
  • Price/Book Value: 1.3

Investors are like fisherman; they all have a story of the big one that got away.

Consider Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), which under the management of legendary investor Warren Buffett, grew from a small textile manufacturer into a massive, business conglomerate. If you had invested $1,000 in Berkshire back in 1964, your stake would be worth around $16 million today.

These days, of course, Berkshire is all grown up. So savvy investors must therefore look for the next Berkshire with similar business traits and a lot more room to grow. I have one possibility for you: Fairfax Financial Holdings (TSX: FFH).

Fairfax looks remarkably similar to what Berkshire Hathaway looked like 40 years ago when it was generating solid double-digit returns. For the better part of the last three decades, this company has been run by Prem Watsa, who has used the same value-oriented strategies Buffett favors:

  • Focus on wonderful businesses
  • Buy them below their intrinsic value
  • Hold for the long haul

It’s not hard to see why Mr. Watsa has earned the reputation as ‘Canada’s Warren Buffett’. In the same way Berkshire Hathaway’s insurance businesses provide a platform for Buffett’s investing activities, Fairfax’s insurance operations exist to generate cash for Watsa to invest. And over the last 28 years, Watsa has grown the company’s book value per share at a 21.3% compounded annual clip.

But here’s the real reason why I like Fairfax: The company is worth only $14 billion. While that might sound large, keep in mind that Berkshire Hathaway is valued at over $350 billion at current prices.

Why is this relevant? Because as Buffett himself admits, “It’s a huge structural advantage not to have a lot of money.”

In other words, smaller companies have a clear advantage over larger ones. That’s because a tiny name like Fairfax can take advantage of deals that Berkshire could never participate in. And this means Fairfax can rapidly compound its earnings and dividends for decades to come.

Leave a legacy of wealth you can be proud of: RioCan

Company Snapshot: (data as of May 13, 2014)

  • Market cap: $9.2 billion
  • Recent share price: $28.90
  • Trailing P/E: 15.91
  • Price/Book Value: 1.2

Repeat after me: Rich people own real estate.

In every country, through all of time, it has and always will be the rich people who own real estate.

When you own real estate, your tenants pay you rent. Your tenants’ children pay your children rent. Your tenants’ grandchildren pay your grandchildren rent.

When does this end? As long as you never sell the properties, it doesn’t – barring the highly unlikely situation of 100% home ownership. Owning real estate is a time-tested way to create a dynasty of wealth that can last generations.

Of course, most of us aren’t interested in spending our golden years fixing clogged toilets or chasing down rent cheques from tenants. That’s the advantage of a real estate investment trust, or REIT, like RioCan (TSX: REI.UN).

Think of a REIT like a mutual fund but for real estate. With a click of the mouse you can become a partner with an already established landlord. RioCan owns 340 rental properties across the country, encompassing nearly 82 million square feet.

But RioCan is a little different from your traditional landlord. The trust specializes in commercial and retail properties, renting out its properties to businesses like Walmart, Canadian Tire, Shoppers’ Drug Mart, and many other corporations I’m sure you know.

Needless to say, these types of tenants are far more reliable than the friendly people answering an ad on Kijiji. They always pay their rent on time and are certainly not going out of business in the foreseeable future.

Best of all, because of the way this firm is legally structured, it pays NO federal corporate income taxes. And because it is required by law to pay out most of its profits to unitholders, the trust yields a hearty 4.9%.

Remember, we said the true test of a wonderful business is how well it fares during times of uncertainty. That said, RioCan has managed to pay a distribution to unitholders every year since its initial public offering in 1994 — a period that included three major recessions. In fact, the trust even managed to raise its distribution during the height of the last financial crisis in 2008.

This company hasn’t missed a dividend payment since 1829: Bank of Montreal

Company Snapshot: (data as of May 13, 2014)

  • Market cap: $50.1 billion
  • Recent share price: $77.81
  • Trailing P/E: 12.3
  • Price/Book Value: 1.3

Since 1829, almost four decades before Canadian Confederation, this company has been paying dividends to its loyal shareholders.

Think of everything that has happened since that time… two world wars…the Great Depression… dozens of financial panics… stock market bubbles… the list goes on. Yet this stock coasted through all of this turmoil without skipping a single dividend payment to investors.

In fact, through many of these volatile times the company actually increased its dividend. And if history is any guide, it will continue cranking out dividends for another century to come.

This stock is, of course, the Bank of Montreal (TSX: BMO)(NYSE: BMO).For 186 consecutive years the company has managed to pay a dividend to shareholders — the longest streak of any publicly traded company in Canada.

How has Bank of Montreal been able to pull this off?

Well good ol’ fashion Canadian conservatism for starters. Investors have always complained that the country’s banks are too stodgy. But that has been an essential ingredient of their success.

At no other time was this more apparent than during the recent financial crisis. While international bankers indulged in exotic subprime loans and collateralized debt obligations, Bay Street was left relatively untouched. And even if our banks are tempted to chase returns, the Federal government maintains strict regulations on capital reserves, mortgage lending, and foreign ownership.

Moreover, Canada’s banking industry is an oligopoly (code for very profitable). The country’s seven largest banks account for over 93% of assets in the nation’s financial system. This gives them such economies of scale that it’s almost impossible for new industry entrants to compete.

And even if you had the billions of dollars needed to enter this industry, it would be difficult to acquire customers. To move all your accounts to another institution is a hassle. Most customers stay loyal to the same bank their parents started at.

All of this means that Bank of Montreal can generate excess returns year after year without the worry of a competitor driving down margins. That has translated into a growing stream of dividend cheques for shareholders.

Investors: How to build wealth in the stock market

The three stocks have everything you want to see from a high-quality dividend stock — a sustainable competitive advantage, excellent management team, and a track record of rewarding shareholders. If you don’t stray far away from quality names like these, you will be well on your way to generating real wealth in the stock market.

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All figures as of May 13, 2015. As of November 13, 2014, Fool contributor Robert Baillieul has no positions in any of the stocks mentioned in this article; The Motley Fool owns shares of Berkshire Hathaway and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola.

All figures stated in Canadian dollars unless otherwise noted.

This report is: (a) for general information purposes only and not intended as investing advice; and (b) not to be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any entity or security by The Motley Fool Canada, ULC, its employees and affiliates (collectively, “TMF”). This report represents the opinion of the individual author and does not attempt to give you professional financial advice or advice that relates to your personal circumstances.

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