The idea behind successful long-term investing is simple: Just own a portfolio of growth stocks that can churn out consistent increases in their revenue and net income. Over time, the steady growth of the business will result in a higher share price, bestowing investors with attractive capital gains.
A bonus is that dividend-paying companies that enjoy better business fundamentals will also end up increasing their dividends along the way, thus allowing investors to enjoy the best of both worlds.
These are the types of companies that I will hold over years or even decades as they can help to compound my money.
Of course, it's important to identify companies with attractive characteristics that are worthy of long-term ownership. These businesses should have a strong competitive moat and be dominant players within their respective industries. They should also display healthy top- and bottom-line growth over multiple years and be consistently free-cash-flow generative.
With these characteristics in mind, here is a trio of stocks I own that I never intend to sell.
Image source: Getty Images.
1. Mastercard
Mastercard (NYSE: MA) is a payment processing company with a total of around 3.4 billion debit and credit cards issued worldwide. The business is one of two dominant payment companies in the world with the other being Visa , and had a market share of 27.4% in the U.S. back in 2022, up from its five-year average of 22%, according to Nilson Report.
Mastercard boasts solid financials with revenue rising from $18.9 billion in 2021 to $25.1 billion in 2023. Net income jumped from $8.7 billion to $11.2 billion over the same period, and the business is also highly free-cash-flow generative with an average of $9.9 billion churned out over the three years. Mastercard also increased its quarterly dividend by 16% year over year to $0.66 at the end of last year, representing more than a decade of consecutive dividend increases.
The strong performance has continued in the first half of 2024. Mastercard saw its revenue rise 10% year over year to $13.3 billion while net income shot up 20.4% year over year to $6.3 billion. The good results were attributed to robust consumer spending and a tourism rebound that saw cross-border transaction volume climb 17% year over year for the second quarter of 2024. Free cash flow came in at $4.1 billion, inching up 2.6% year over year from $4 billion in the previous comparative period.
With Mastercard's solid reputation and track record, I am confident that the business can continue to grow steadily over the years while increasing its dividends along the way.
2. Alphabet
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is the parent company of Google and enjoys a dominant market share in the internet search space with its Google Search. The company also offers a cloud service (Google Cloud) and owns video-sharing website YouTube. I like the company for its strong market share in internet search, allowing it to serve targeted advertisements from its customers.
Alphabet boasts solid financial numbers with growth in both its top and bottom lines. Revenue went from $257.6 billion in 2021 to $307.4 billion in 2023 while operating income climbed from $78.7 billion to $84.3 billion over the same period. Net income was impacted by one-off adjustments such as gains and losses on equity and debt securities but stripping those out, it would have also risen steadily over the three years. The business also generated an average positive free cash flow of $65 billion every year.
Alphabet's strong performance has carried on for the first half of 2024. Revenue increased by 14.5% year over year to $165.3 billion while net income surged by 41.5% year over year to $47.3 billion. The company continued to churn out free cash flow of $30.3 billion for the half-year and recently initiated its first-ever quarterly dividend of $0.20 per share.
There could be more to come from Alphabet as it unleashed Gemini last December, its most advanced artificial intelligence (AI) model to date. The new model is capable of more sophisticated reasoning and can understand and analyze information better, thus providing superior search results. Back in May, the company updated Gemini with new features and this generative AI trend could propel the company's earnings and cash flows higher over time.
While investors may fret over the significant sums that Alphabet needs to spend on research and development, I believe that the company is in a good position to harness the power of generative AI, incorporate it into its products and services, and eventually monetize it to help the business to grow and improve customer loyalty.
3. Adobe
Adobe (NASDAQ: ADBE) is a software-as-a-service company that operates platforms for users to manipulate photos, design webpages, and edit videos and graphics, among other things. The company is also famous for its portable document format (PDF), which has seen widespread use around the world for all forms of documentation.
Adobe's financials show that the business has been doing well and growing steadily. Total revenue increased from $15.8 billion in fiscal 2021 to $19.4 billion in fiscal 2023 with net income climbing from $4.8 billion to $5.4 billion over this period. Like Alphabet and Mastercard, Adobe is also adept at generating free cash flow with an average free cash flow of $7.1 billion from 2021 to 2023.
The business has continued to grow, with revenue hitting a new record in the second quarter of this fiscal year. For the first half of fiscal 2024 (ended May 31), revenue climbed 10.8% year over year to $10.5 billion. Operating and net income fell year over year because of a $1 billion acquisition termination fee for Figma, but would have risen by 18.1% and 25.6% year over year, respectively, if this fee was excluded. Free cash flow was healthy at $3 billion for the latest six-month period.
Adobe has also hopped on the generative AI bandwagon with the release of its AI-powered assistant, Adobe Firefly. Its latest Illustrator and Photoshop releases incorporate Firefly features that help users save time and empower designers and creators to utilize the tools to create unique designs and make complex edits. Such features should increase the platform's attractiveness to users and help Adobe garner more subscribers to its software.
Elsewhere, Firefly has also been incorporated into Adobe's business-to-business (B2B) Journey Optimizer to personalize experiences for buying groups that are responsible for major purchasing decisions. This feature assists famous brands such as Accenture , IBM , and Microsoft in coordinating and organizing deals to gain insights. Generative AI has the potential to introduce many more features into Adobe's products to help its customers, making them sticky and spend more in the future. These features also increase the attractiveness of Adobe's platform to new customers. The company has good potential for further growth and I believe it can continue to see its net income and free cash flow grow over time.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Royston Yang has positions in Adobe, Alphabet, and Mastercard. The Motley Fool has positions in and recommends Adobe, Alphabet, and Mastercard. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy .
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