If building multi-generational wealth is one of your investment objectives, you may consider buying growth stocks for the long-term portfolio. Multi-generational wealth may sound like something you need a large amount at the start to build, but with long-term compounding, you can snowball a relatively small initial investment into a small fortune.
What makes long-term growth stocks such a strong choice for this strategy? It all has to do with the twofold way such stocks have the potential to produce above-average annualized total returns over a long time frame.
That is, high-quality long-term growth stocks can steadily appreciate in value over time in line with earnings growth. Some of these stocks can even make gains that outpace earnings growth if the market decides to “reward” them with a re-rating to a higher valuation.
Alongside price appreciation, these stocks typically have consistent dividends that increase over time. If reinvested back into the stock, these dividends can further boost overall returns.
The following seven stocks stand out as names that could be winning growth stocks for the long-term investor.
American Water Works (AWK)
Based in Camden, New Jersey, American Water Works (NYSE:AWK) is a water utility holding company. Across the U.S., American Water Works provides water and wastewater services to over 3.5 million customers in 14 states. While this may not sound like a dynamic, cutting-edge industry, I wouldn’t knock the growth potential of owning a water utility stock.
According to sell-side earnings forecasts, the company is expected to report high single-digit earnings growth over the next few years. Such growth is likely sufficient for AWK stock to sustain its current valuation of 24.9 times forward earnings. Along with the possibility of steady price appreciation, AWK has a 2.3% dividend yield. Not only that, payouts have grown by an average of 9.14% annually for the past five years.
With 15 years of consecutive dividend growth under its belt, American Water Works is a decade away from gaining “Dividend Aristocrat” status. AWK isn’t going to make you a fortune quickly, but over decades, an investment in the stock could compound into a sizable nest egg for your grandchildren.
Costco (COST)
Costco (NASDAQ:COST) whose reputation as one of the top growth stocks for the long term precedes it. That is, shares in the wholesale club operator have a very strong track record in price appreciation over many years. Over the past five years, shares have surged by more than threefold.
Over the last decade, COST stock is up a staggering 732%. Yes, with its sterling reputation, buying COST today will be costly, and not just because each individual share costs around $850. At current prices, Costco Wholesale trades for 53 times forward earnings. If so pricey, why is it still worthy of a long-term buy? As Seeking Alpha contributor Noah’s Arc Capital Management recently argued, various factors suggest that COST can sustain its valuation and continue to gain.
These factors include the discount retailer’s unique business model, namely its subscription-based revenue stream, its high return on common equity, and the prospect of further new store growth via international expansion. COST has a relatively small 0.5% dividend, but payouts have increased 19 years in a row, with the latest dividend hike coming in at 13.7%.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), best known as the parent company of Google and YouTube, may be your best choice out of the “Magnificent Seven” regarding long-term growth potential. At least when one weighs the tech giant’s growth prospects against its current valuation.
Right now, GOOG stock trades for around 25 times forward earnings. This puts it at the low end of valuations for Magnificent 7 stocks. Yet as Louis Navellier and the InvestorPlace Research Staff recently pointed out, despite concerns about Google’s search business under threat by AI-related disruption, these worries may be overblown. Moreover, other factors, like the continued growth of Alphabet’s Google Cloud segment, provide further credence to forecasts calling for GOOG’s earnings to continue growing in the 15% range.
To top things off, Alphabet has started to pay a dividend. While very tiny today, this 20-cent per share payout could grow substantially over time, especially as GOOG’s annual earnings could hit the $10 per share mark by 2026. Other Magnificent 7 stocks could outperform in the near term, but if you’re looking for a mega-cap tech stock offering the strongest chances of staying power, GOOG stands out as your best choice.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is another name commonly cited as one of the top growth stocks for the long-term investor. The defense contractor’s dividend growth policy one key reason behind this long-term growth reputation. For the past 21 years, Lockheed Martin increased its dividend on an annual basis.
At current prices, LMT stock sports a 2.7% forward yield. Payouts have increased by an average of 7.7% over the past five years. Alongside steady, growing payouts, however, is the potential for more-than-satisfactory returns via price appreciation. The current geopolitical climate leaves top defense firms like Lockheed Martin poised to benefit from increased defense spending by the U.S. and its allies.
As Barrons’ Al Root recently pointed out, U.S. defense spending has increased by 6% annually over the past five years, and global defense spending has accelerated since 2016. If that’s not encouraging enough, Lockheed Martin’s backlog is large enough to mitigate the remote possibility of near-term defense spending cuts. Besides rising in value in line with earnings growth, increased confidence that elevated growth is here to stay could lead to multiple expansions for LMT. Shares currently trade for only 17.8 times forward earnings.
Paychex (PAYX)
Investors soured on Paychex (NASDAQ:PAYX) recently, but shares in the payroll processor and outsourced human resources services provider could prove to be a solid growth name to buy and hold for the long haul. PAYX recently tumbled after earnings, as uncertainty about the challenges small and medium-sized businesses face countered key positives with the earnings release.
However, despite the pessimism, Paychex operates in a fairly resilient industry. In time, macro issues like inflation can ease, leading to a stronger environment for Paychex to thrive. Forecasts call for consistent mid-to-high single-digit earnings growth in the coming years. Dividend growth potential is also very promising with PAYX stock. In fact, back in May, I pointed out how Paychex may be one of the best dividend stocks out there.
PAYX currently has a forward dividend yield of 3.3%. For nine years in a row, PAYX increased its rate of payout. Payouts have increased by an average of 9.7% annually over the past five years. The company’s latest 10% dividend increase was in line with the level of dividend growth seen in recent years.
Texas Roadhouse (TXRH)
Texas Roadhouse (NASDAQ:TXRH) delivered strong growth over the past decade, but shares in the steakhouse chain have been on a tear this year. Year-to-date, the stock is up by around 42%. With such a big run-up, you may initially think that shares have gotten ahead of themselves.
Yet while there may be potential for a correction or sell-off in the near term, TXRH stock still stands to be one of the best growth stocks for the long term. Headwinds like cost pressures are easing, the company is still reported strong levels of same-store sales growth. Best of all, the chain continues to open new locations, with 30 expected to openthis year.
All of this points to further double-digit earnings growth, which in turn translates into additional price appreciation and the high likelihood of continued high dividend increases. Shares yield 1.4% today, and payouts have grown by an average of 17.2% annually over the past five years. While pricey at 29 times forward earnings, a continued growth streak could outweigh this, resulting in strong total returns in the years to come.
Visa (V)
Visa (NYSE:V) has only been a public company for one generation, but during this time shares have delivered strong returns for investors, through both capital growth and dividends. For the generations ahead, this tradition may continue, thanks to a secular growth trend: the digitization of payments.
As you likely know, Visa and its rival Mastercard (NYSE:MA) effectively have a global payments duopoly. What was previously cash-based transactions continues to shift to card/digital-based transactions, enabling Visa to sustain solid revenue and earnings growth, most recently seen in the company’s last quarterly earnings release. As the world keeps going cashless, expect this trend to continue.
Since going public in 2008, Visa has increased its dividend. Over the past five years, Visa’s payouts have grown by an average of 15.% annually. The latest quarterly dividend hike, from 45 cents to 52 cents, represented annual dividend growth of around 15.6%. The current cash dividend with V stock may seem low at 0.8%. However, as time passes, these payouts will play an even more significant role in producing long-term total returns.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.