The last couple of years have seen outsized returns for stocks, especially those in the US, but that doesn’t mean now is a bad time to invest. The truth is there is never a bad time to invest as long as you are looking to stay invested for the long term.

From its inception in 1984 to 2022, the FTSE 100 index has gained around 5.5% per year in price terms and 7.5% per year in terms of total return, which is far better than the returns on cash over the same period.

The US market has performed even better, generating a total annual return of around 10% per year over the last 30 years, even though markets have endured several crashes, including the great financial crisis which almost sank the US banking sector, several recessions, a pandemic and a series of conflicts.

According to the latest Barclays Equity Gilt study of long-term returns for different asset classes, if you hold UK stocks for two years you have a 70% probability of enjoying better returns than if you hold government bonds or cash.

If you hold stocks for 10 years, the probability of beating government bonds and cash rises to 91%, so there is no question if you truly want to build wealth then stocks are your best bet, but you shouldn’t put all your eggs in one basket, be that the same country, the same industry or the same investment ‘style’.

We have gathered together three individual stocks and one investment trust which we believe will stand the test of time over the next 30 years or more.

In some respects, we have played it safe, picking a mega-cap quality company and a super-reliable dividend machine, but every portfolio should have an element of ‘blue-sky’ potential so we have included a smaller company which we think has great prospects and a ‘future-filled’ investment trust which is trading at an uncustomary discount to net asset value.

A great compounder:  RELX

(REL) £32.99

When you make an investment into a dividend-paying stock you can set yourself up to benefit from a compounding effect which played out over decades can be extremely powerful.

Compounding describes the process where investment returns themselves generate future gains. The value of an investment can increase exponentially because growth is earned on the initial sum of money plus the accumulated wealth.

Imagine you invest £1,000 in a stock and it increases by 5% in year one to £1,050. If the stock rises by another 5% in year two, it will be worth £1,102.50. In the first year you earned £50 and in the second year you earned £52.50. If you add dividend income to the mix and reinvest it into the shares you can amplify this effect and if that stream of income is also growing, so much the better.

RELX has transformed itself over several years from a publisher of printed academic materials to a provider and analyser of business-critical data across a range of sectors – much of which is sold on a subscription basis – while still dominating the market for scientific journals and running a successful events business. The company has been investing in innovation around data analytics and AI for several years which is helping to reinforce an already strong competitive position.

This has underpinned reliable growth in revenue, profit and cash flow and in turn allowed the business to increase its dividends consistently (even during the pandemic).

The shares are not cheap on a 2024 price to earnings ratio of 26.9 times but as Berenberg analyst Carl Murdock-Smith observes: ‘If looking on a medium- or long-term view, RELX’s valuation becomes less stretched due to its growth. The company has demonstrated the ability over time, on an underlying basis, to deliver consistent mid-single-digit top-line growth, with modest operating leverage leading to higher EPS (earnings per share) growth.’ [TS]

Enduring quality : Microsoft 

(MSFT:NASDAQ) $389.33

When it comes to high-quality stocks, if Microsoft (MSFT:NASDAQ) isn’t already the benchmark by which all others are judged, it probably should be. The Seattle technology giant has come a long way since a spotty Bill Gates (with partner Paul Allen) launched Windows on the world, emerging as a software empire critical to businesses and consumers globally, and investment returns have been consistently excellent for years.

Just looking at the last decade, Microsoft shares have handed investors an average total return (share price gains plus dividends) of 26% a year, 41% better than the Nasdaq Composite and more than twice that of the S&P 500. Put another way, if you had invested $1,000 in the stock 10 years ago, your stake would now be worth $9,811, or $14,133 over 20 years.

These market average-mashing returns are not by accident. Operating margins have increased by more than 10 percentage points since 2018 to last year’s 41.8%, and if most recent trading is anything to go by (48% in the second quarter 2024), they’re expanding faster and faster. Returns on capital and equity, both strong indicators of a quality business, are 28.9% and 38.5%, based on Stockopedia data, where over 20% is considered good and above 25% exceptional. 

Microsoft scores 97 out of 100 on Stockopedia’s quality ranking, while Morningstar analyst Dan Romanoff recently upped his fair value estimate from $420 to $435, noting the company’s ‘wide’ economic moat.

Cloud computing has been a big driver for business in recent years and Microsoft has been remarkably successful at selling its products – the Windows operating systems, Microsoft 365 suite of productivity applications, Azure big data analytics, etc – as cloud-hosted subscriptions rather than upfront licences.

Microsoft is widely seen as the best software bet AI (artificial intelligence), where the company has a crucial partnership with Open AI, the developer of ChatGPT. This point has been hammered by the rapid progress of Copilot, its AI-powered intelligent cloud productivity tool, whose customers numbered around 53,000 in March 2024, a significant increase from 18,000 in September and 11,000 in July.

Yes, it faces constant regulatory hurdles to overcome, and the expectations bar is always set high, leaving little scope to escape disappointments unscathed. Owned by long-run quality investors like Fundsmith Equity (B41YBW7) and Blue Whale Growth (BD6PG78), Microsoft is arguably the first stock to fill any portfolio. [SF]

Disclaimer: Steven Frazer has a personal interest in Fundsmith Equity and Blue Whale Growth.

Blue sky potential : MicroSalt

(SALT:AIM) 70.5p

Excess sodium consumption is a major contributor to hypertension and heart disease with a big part of the typical person’s intake hidden in processed foods. With this health crisis front of mind, the WHO has set a target for slashing global sodium consumption by 30% by 2025, which it estimates will save 7 million lives by 2030.

One market minnow on a mission to reduce sodium consumption and heart disease is MicroSalt (SALT:AIM), producer of a patented full-flavour, low-sodium salt for food manufacturers and consumers that is strengthening its intellectual property position and could reward a punt if its technology fulfils its tasty potential over the next decade, though the market newcomer is no stock for widows and orphans.

Revenue remains modest and the company chalked up operating losses of $2.5 million in the year to December 2022 followed by a $1.7 million deficit in the six months to June 2023 due to ongoing investment in the MicroSalt brand and new product formulations. Liquidity is also thin given TekCapital’s (TEK:AIM) majority stake.

Nevertheless, the shares are up 65% on February 2024’s 43p IPO (initial public offering) price in recognition of its potential to disrupt the food industry and growth scope in a global sodium reduction ingredients industry worth an estimated US$5.5 billion in 2021 and forecast to reach US$9.6 billion by 2032.

Management believes the £30.5 million cap, whose consumer products include 50% less sodium salt shakers and SaltMe! low sodium crisps selling on Amazon (AMZN:NDQ) and stocked on retail shelves across the pond, is well positioned to capture growth in the low sodium market and enter the larger salt market, with major, though as yet unnamed, food, drink and snack manufacturers developing and trialling MicroSalt across their products.

MicroSalt has also secured its first placement into the premium food service sector with Carma, a chain of restaurants in Canada, which CEO Rick Guiney said demonstrates ‘the wide appeal of Microsalt and offers a real-world example of our potential in the foodservice channel’. [JC]

A future-facing investment trust :

Scottish Mortgage (SMT) 841.1p

We couldn’t write about investing in long-term trends without picking Scottish Mortgage (SMT), one of the biggest and most popular investment trusts, which invests in what it calls ‘the world’s most exceptional public and private growth companies’ at the forefront of huge structural shifts.          

The managers explain their approach: ‘We believe a small number of exceptional growth companies will drive returns. We aim to find them and own them for long periods of time. The businesses we seek have long growth runways ahead of them. They address large and growing opportunities. They possess an enduring competitive advantage, disrupting their respective industries or even creating new ones. Many are founder-led and have a cultural edge that will tilt the chances of success in their favour.’

The list of the top 10 stocks is heavily skewed towards US technology companies, but it would be wrong to assume Scottish Mortgage is ‘just another tech fund’.

It has a lot of exposure to healthcare and consumer stocks, as well as to emerging markets and China, but maybe its biggest point of differentiation is it invests in privately-owned companies, many of which have come to market or are expected to come to market, generating enormous returns on the trust’s original stake.

Private investments include SpaceX, whose Starlink satellite network is expected to unlock opportunities in global internet connectivity; Northvolt, which aims to transform the European transport sector with its battery technology; and Bytedance, which is at the leading edge of technology using AI (artificial intelligence) to change how content is distributed.

The shares trade at a 7.5% discount to NAV (net asset value), so there is upside potential if they revert to par on top of any gains in the price.

As the managers point out, however, while the trust’s targeted returns will appeal to many investors, ‘the road achieving them may not’ because by its nature investing in companies at the forefront means the trust’s performance is likely to deviate – sometimes quite widely – from the rest of the market.

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