From the April 1999 to April 2014 the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained a total of 75% excluding dividends (according to Google Finance). That's just 5% on average per year which is far from an impressive return and goes to show the importance of dividends in boosting overall returns to shareholders.
Of course despite the mediocre capital gains rate of the index, there are plenty of individual companies which have provided shareholders with outstanding returns over the past 15 years. Woolworth Limited (ASX: WOW) for example has gained 625% over the same time frame! Woolworths' stellar result highlights once again the importance and potential to 'value-add' from stock picking.
So which companies should investors consider buying to provide significant outperformance over the next 15 years? Owning the same stock for 15 years implies a true 'buy and hold' investment approach. Arguably the only type of stock which can continue to do well over the long term is a quality company, not some 'go-go' stock which might be all the rage for a few years but ultimately prove to be a poor business.
Quality businesses with reasonable growth potential can be found in many forms – here are a few which could be significantly larger businesses in 15 years' time.
Monopoly-type companies
The $5.5 billion energy infrastructure firm APA Group (ASX: APA) and acquisitive toll road operator Transurban Group (ASX: TCL) own assets that are very difficult to replicate and which should be able to increase their charge to customers at a rate at least in line with inflation.
Sustainable comparative advantage
Businesses with sustainable comparative advantages such as CSL Limited (ASX: CSL) and (no surprises here!) Woolworths have strong business franchises with the potential to maintain their above average returns on capital over the next 15 years just as they have done in the past.
Niche providers
Niche providers of goods and services can also prove to be wonderful long-term investments. Automotive accessories provider ARB Corporation Limited (ASX: ARP) is an example of just such a company having increased by 985% in the past 15 years. Given the potential for ARB to boost its exports, the company could continue to provide sound returns to shareholders for the next 15 years too.
Foolish takeaway
A buy-and-hold strategy requires investors to identify companies with very good long-term prospects. While the Holy Grail might be to discover these companies when they are still tiny; at the right price even established blue-chip companies make wonderful long-term investments.
